December 29, 2006
Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
Dear Ms. Morris:
Automated Trading Desk, LLC (ATD) is pleased to submit its comments with respect to SR-NASD-2006-134. ATD is the sole owner of Automated Trading Desk Finanical Services, LLC and Automated Trading Desk Brokerage Services, LLC. Through its broker-dealer subsidiaries, ATD handles significant volumes of order flow in NASDAQ, listed, and OTCBB/PS securities.
With respect to the NASD's proposal, ATD believes that the SEC should take this opportunity to address a market discrepancy caused by the implementation of SEC Rule 612 (the sub-penny rule). After implementation of Rule 612, the National Best Bid and Offer in NASDAQ securities was able to be set at sub-penny prices with respect to sub-dollar orders/quotations. (ATD notes that Rule 612 would allow for sub-penny pricing under $1.00 in listed securities, but due to system constraints at the exchanges, this pricing has not been implemented in listed securities). However, the NASD's Manning interpretations regarding the minimum amount of price improvement generally discusses the required amount in terms of pennies.
The current NASD guidance for Manning with respect to Rule 612 requires $.0001 improvement when the resting limit order is outside of the NBBO. However, it appears to require a full penny of price improvement when the resting limit order is at the NBBO.
Therefore, it is possible to hold a resting limit order at a sub-dollar price, and be prevented from providing enhanced liquidity to ANY order flow if the resting limit order is at the NBBO (even by crossing the sub-penny spread). For example:
NBBO: 10 X 1; .8800 - .8801
Broker-Dealer A has a resting limit order to buy at .8800. If Broker-Dealer A receives a market sell order, Broker-Dealer A would have to buy at .8900 in order to interact proprietarily with the incoming sell order. Obviously, in a sub-penny market, providing full penny price improvement is not a reasonable alternative.
This is in contrast to the situation where the Broker-Dealer has a resting limit order that is outside of the NBBO. For example:
NBBO: 10 x 1; .8800 - .8801
Broker-Dealer B has a resting limit order to buy at .8799. Broker-Dealer B may interact with an incoming sell order at .8800, the minimum pricing increment in a sub-dollar security.
Recently, the NASD has proposed revising how the Manning requirements are applied to OTCBB and Pink Sheet securities (SR-NASD-2005-146). As part of that proposal, the NASD has proposed modifying the interpretation of Manning for sub-dollar limit orders. Pursuant to that filing, the NASD has proposed that the minimum amount of price improvement for sub-dollar stocks at the NBBO would be the lesser of $.01 or 1/2 the current spread. ATD believes this is a reasonable balance between the concerns implicated by Manning, and the reasonable functioning of the marketplace in handling sub-dollar orders.
Therefore, ATD respectfully requests that the SEC modify the NASD's current proposal to require the lesser of $.01 or 1/2 the spread of price improvement with respect to the implementation of Manning protection to sub-dollar orders.
If you have any questions about the above, I would be happy to discuss these matters with you further.
/Shane E. Swanson/
Shane E. Swanson
Director of Compliance
Automated Trading Desk, LLC