December 31, 2014
I operate a partnership that adds liquidity in the shares of small, listed companies as part of its business.
I believe that the best way to increase liquidity of small companies is to promote a transparent, fair, and simple market — one in which the best visible bid or offer is given first matching priority for almost every trade, with the possible exception of large, block trades between natural counterparties.
The rate at which many small cap stocks trade off-exchange today exceeds 50%, the majority of which appears to be internalized order flow with trivial price improvement (typically $.0001 per share). Such a high level of queue jumping dramatically disincentivizes improvement of the NBBO by lit market participants, and shrinks the size of visible liquidity on the order book. Investors pay the price, whether they can see it or not.
The 5 cent tick size will significantly increase the incentive for brokers internalize orders, unless curtailed by a trade-at rule as proposed for Group 3. As such, I strongly agree with trade-at being a part of the pilot.
However, I think that the trade at Group 3 should mandate a minimum price improvement of the full five-cent tick increment for Retail Investor Orders, if theres to be any exception at all. Any exception to trade at under the guise of price improvement will distort the market and reduce the incentive to post a better NBBO, increasing spreads and reducing the average displayed size at the bid/ask, counter to the goals of the five-cent increment.
Given that the objective of the pilot is to increase the transparency and liquidity of small companies, I would also suggest considering:
1. Having a minimum order lifespan of at least 1 second for any order that wants to be considered for the NBBO or be otherwise protected. Although we use extensive automation in our own operations, I think that markets should ultimately support human investors and the companies in which they invest. Fleeting orders at the NBBO hinder liquidity rather than helping it.
2. I would also suggest mandating that all payment for order flow, if it is to remain in existence at all, be paid back to the ultimate customer in all cases, to remove the brokers conflict of interest with the customer that such payments induce.
3. Finally, I recommend that the SEC reject any proposed broker priority policies, as any form of queue jumping undermines fairness and transparency, and hence liquidity. The negative effects of queue jumping on liquidity are greatly magnified in lightly-traded securities.
Respectfully submitted,
Michael Jacejko
Birch Bay Capital, LLC