From: Robert Bloch [rbloch@wi.rr.com]
Sent: Tuesday, February 10, 2004 11:53 AM
To: rule-comments@sec.gov
Subject: S7-12-03 --in re: S7-07-04

This e-mail is in response to requests for comments on Competitive Developments in the 
Options Market.

I will be brief. 
Basically, I feel that payment for order flow(PFOF) and order internalization do not 
accrue to the benefit of the options customer. 
There are no free lunches out there, and pfof has to be paid by someone, and it comes at 
the expense of the customer. 
And the sole reason for the creation of BOX is for order internalization, so the big 
firms can trade against their customers lack of information and not allow the other 
exchanges enough time for price improvement (3 seconds is ridiculous, as everyone knows). 
The BOX is nothing more than an attempt to steal business from the other exchanges, and 
really offers nothing in a value added way. It is basically owned by the big firms, and 
their advantages of internalization should be obvious to all. 

I am sure others much more knowledgeable than I will comment further, but I did want to 
voice my concerns about PFOF and order internalization. They are anathema to me. 

One more thing...why do you consider PFOF any better than the very payments that mutual 
funds have been making to brokerages for customer orders, that you have criticised? 
Aren't they basically the same: pay for the order, customer be damned?

Respectfully,
Robert H. Bloch



From: Robert Bloch [rbloch@wi.rr.com]
Sent: Tuesday, February 10, 2004 1:20 PM
To: rule-comments@sec.gov
Subject: S7-12-03: in re: S7-07-04

I have commented earlier, but would like to add some quotes from a writer on the website 
entitled StreetInsight.

I have copied and pasted, and would add that he has better expressed my anathema to pfof 
and order internalization than I did:

        SEC 'Studying' Biggest Afflictions of Independent Options Traders
02/10/04 11:09 AM EST     Payment for Order Flow is basically a sanctioned kickback. 
           Internalization hurts both customers and floor traders. 
     


Talk about closing the barn door after the horse has left the stable. The SEC is now 
"studying" the two biggest scourges of the independent options trader: Payment for Order 
Flow (PFOF) and Internalization. 

The former refers to specialists/market makers paying order providers for the privilege 
of seeing their orders. Since the end customer doesn't get the benefit of the payment, it 
is effectively a sanctioned kickback. It's insidious in that if one exchange participates 
in PFOF the others have to match, and thus nothing is accomplished other than forking 
over some money. 

Internalization refers to order providers trading with their own customers without 
"showing" the order on an exchange. This basically allows the providers to cherry pick 
good trades and dump bad orders onto a floor. It hurts the customer in that it decreases 
their chances for price improvement and hurts the floor traders in that they are 
obligated to eat bad trades without the benefit of seeing some of the good ones. 

 

Respectfully submitted by: 

Robert H. Bloch