March 4, 2008
In May of 2006 I wrote a letter to David Krell, ISE President and CEO, objecting to the subject proposed rule change. At the time I sent a copy of the letter to the SEC. Recently, the SEC contacted me seeking permission to file the letter as comments to the proposed rule change. I welcome that opportunity. Therefore, please consider my comments in the letter to David Krell as well as the following comments as reasons to deny the ISE rule change proposal.
One way to point out the absurdity of this rule change proposal is to consider the necessary WARNING that should accompany all ISE notices, publications, adds, news letters, etc, if the SEC approves this rule. It might look something like this:
WARNING: The mission of the ISE is to protect the competitive advantage of our Specialists. Therefore, we welcome all unsophisticated retail trades which will afford our specialists the opportunity to profit from your rudimentary pricing capability. If however, you become a frequent trader who employs sophisticated pricing techniques then, with the approval of the SEC, you may be subject to being categorized by the ISE ( the formula for this categorization is subject to change at the sole discretion of the ISE) as a "professional account holder." If you become a "professional account holder" then under this new designation you can expect to receive inferior fills and pay increased fees for trading. Additionally, with the approval of the SEC, the ISE can compel your broker to provide us ( The ISE) with your trading information from other options exchanges. The SEC has found that your rights to privacy and anonymity are superseded by the ISE's need to protect their specialists from undue competition. Moreover, If you become a "professional account holder" you will be required to pay the same fees as specialists with none of the accompanying benefits: You will not be allowed to stream quotes electronically, you will not receive market maker or broker dealer margins on your trades, you will still be subject to cancellation fees, and unlike specialists you are restricted to entering trades on only one side of the markets. In an effort to provide full disclosure, it should be noted that if you become a "professional account holder" you will essentially have all of the disadvantages and none of the advantages of trading on the ISE. Of course, all of this is made necessary to protect the small investor, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism for a free and open market. WE believe the small investor is better served when fewer orders are represented in the marketplace and only the specialist has the opportunity to provide a fair and orderly market. Other sources of liquidity are deemed inferior by the ISE even if they result in tighter pricing for all participants. Finally, we provide this WARNING because we feel it is important to inform our customers that excess volume is not welcome on the ISE and if you use information and/or technology to help you trade ( then you are competing with our specialists and making it less profitable for our specialists to trade with ill-informed investors and with you) and therefore your orders will be permitted only under inferior circumstances. Be reminded that because the SEC has approved our rules we are inoculated from any causes of action that may allege discrimination, restraint of trade, or collusion with other exchanges. Lastly, because the SEC has approved this rule change, it can readily be inferred that other similar rule changes are likely in the future and additional 'degrees of customer" may be designated as needed. And as a public service we suggest you check the rules of other exchanges as they may implement other trade designations that may conflict with ours.
Aside from the many issues raised by my letter to David Krell and the hypothetical warning noted above, I hope the SEC will be extremely cautious when permitting new trader designations when the clear lines between broker-dealers and retail traders have served the markets for so long so well. Does the SEC really want to open a Pandora's box of endless Customers designations by multiple exchanges: all of which at their core are unnecessary , difficult and expensive to enforce, and are discriminatory restraints of trade. Imagine if each exchange came up with their variation of just this proposed ISE rule. The SEC now has 6 new customer categories to regulate...each presumably entitle to different standards of protection and treatment in the marketplace. Each requiring the complicity of other exchanges to enforce the rules of another exchange....potentially in conflict with the rules of that very exchange.
The SEC should deny the ISE rule request. The SEC should not allow its longstanding rules to be manipulated by the ISE to enhance and protect their bad business model. They should not be rewarded for simply asserting the compelling language of the Exchange Act when the rules they propose have consequences directly in contravention of that very Act and its intentions.
Charles B. Cox