March 21, 2014
I am once again seizing the opportunity to submit comments to the Commission regarding the Arca petition to alter its current priority rules.
I'd like to address several comment letters posted, and attempt to clear any confusion regarding this proposal.
The important distinction to understand with this proposal it that it will allow floor participants to IMPROVE pricing on customer orders in open outcry. Under current Arca rules, the electronic consolidated book must be cleared prior to an open outcry execution even when the consolidated book is INFERIOR to the price trading in open-outcry.
Customer gives an order to sell 1000 HYG Mar 94 Calls
Prevailing NBBO market is .30 - .35 and Arca market is also .30 - .35 on the consolidated book
Floor broker enters the trading crowd and asks for a market. Trading crowd responds .37 bid for 1500 and .43 offer on 500. To be clear, the trading crowd has provided a bid that is .02 BETTER than the current NBBO or Arca book bid. This is an improvement of 40% of the bid/ask spread.
Under current Arca rules the floor-broker can NOT sell the crowd 1000 HYG Mar 94 Calls at the trading crowds bid of .37 ... the current rule structure requires the floor-broker to fulfill the .35 bid on the consolidated book PRIOR to trading in the crowd at .37
That's correct, in case this doesn't make sense to anyone, I will repeat myself. Under current NYSE Arca Rules the floor-broker would have to trade with the INFERIOR bid in the consolidated book before he could trade with the SUPERIOR bid in the trading crowd. This would seem contrary to every best execution standard and customer protection rule ever published. As crazy as it seems, this is how the current rules are written.
The proposal now in front of the Commission will amend Arca rules to facilitate trading with the BEST price available, and not have to fulfill inferior markets on the consolidated book.
Therefore, if this proposal is passed the floor-broker in the previous example will be able to sell and fill the entire customer order at .37, which is better than both the NBBO and consolidated book by $2,000 net cash.
In addressing the concerns put forward by Mr. Abe Kohen in his comment letters, I suggest the following
Mr. Kohen states - "When you grant priority to one class of traders you are necessarily disadvantaging the other class"
I'm not sure if Mr. Kohen is aware that current Arca rules are structured so as to actually disadvantage on-floor market makers. So, in order to resolve this clear disadvantage to the floor community, the Arca has presented this proposal to effectually "even the playing field", as many others have suggested in their comments.
It should also be noted, as Mr. Hart and Mr. Alvira have stated, this filing will not only "even the playing field" for on-floor MM's, but it will allow them an opportunity to improve on posted markets during market duress. Perhaps one of the most compelling arguments for floor based market-makers is that they are required to stand in and make two-sided markets in volatile environments. They cannot just turn off the machines and walk away.
Mr. Kohen then goes on to state, "Best execution is NOT enhanced by allowing more exchanges to disadvantage other traders".
To be certain, this filing will not offer an advantage to one type of trader or another. This rule filing will however, absolutely lead to better pricing opportunities for the customers. While I appreciate Mr. Kohen's efforts to protect his interests in high-frequency trading, let's not overlook the most important player ... the CUSTOMER.
This filing will create an advantage for price improving CUSTOMER orders. The customer is and always should be of utmost concern. It is the customer for whom the rules should be designed to protect and enhance their ability to find liquidity in an efficient capital market.
Id also like to address some of the concerns voiced by Mr. Gerald OConnell of Susquehanna Investment Group.
In his comment letter, Mr. OConnell states, the filing is apparently focused on attracting block cross volume and crowd participants to participate in an open-outcry transaction and therefore promote larger-sized negotiated transactions.
Mr. OConnell's concerns are misguided and unfounded. In fact, this filing will allow for price improvement in an open-outcry trading on ANY size order, whether large or not. Floor market-makers, or even off-floor market-makers being represented by a floor broker, will be able to make improved prices for orders that have priority over inferior prices on the consolidated book.
It should also be noted, that large market-making groups like Susquehanna, often give bids and offers that are improvements on posted NBBO. These may be considered inside markets. This filing will then allow these market-making groups, like Susquehanna, to provide these inside markets and actually trade them on Arca Exchange.
Mr. OConnell goes on to say, The underpinning problem is that these clean-cross orders are usually negotiated outside the view of the off-floor MMs responsible for the vast majority of the displayed liquidity in the subject options.
Again, I will rebut Mr. OConnell by insisting that Susquehanna not only is a group responsible for large portions of displayed liquidity, but also a counter-party to many of the so called clean cross orders. Susquehanna provides extremely competitive markets and they are sought as a counter-party in many transactions.
Often times we have situations where Arca markets are .25 - .35 (dime wide) on the consolidated book. Then, when we quote these markets in the trading crowd, the on-floor MMs will provide no price improvement. Therefore, in these instances we can call Susquehanna (or other large MM group) off-floor and they will provide us a .27 - .33 market, or something similar. This filing, once passed, will allow us to trade the order on the market provided by the off-floor MM at .27 or .33, which is an improvement without having to give priority to the inferior markets provided by the crowd and consolidated book.
The rule filing is not necessarily about attracting large crosses or clean-crosses outside the view of off-floor MMs, this rule is about providing opportunity to IMPROVE markets. This will ceteris paribus, create more efficient and fair markets for ALL participants.