C I N C I N N A T I
S t o c k E x c h a n g e
June 19, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
Mail Stop 5-1
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Response to Nasdaq's Petition for Commission Action Concerning the Trading of Nasdaq-Listed Securities (Release No. 47849; File No. S7-11-03)
Dear Mr. Katz:
The Cincinnati Stock Exchange ("CSE" or "Exchange") respectfully submits the following comments on the concept release ("Concept Release") published by the Securities and Exchange Commission ("Commission" or "SEC") in response to the petition ("Petition") for Commission action filed by the Nasdaq Stock Market, Inc. ("Nasdaq").1 Nasdaq petitioned the Commission to take immediate action to "protect investors" by requesting that the Commission: (1) amend the rules of all markets that trade Nasdaq securities to establish uniform trading rules, and to ensure equal surveillance and enforcement of those rules; (2) order that the markets' costs of regulation be aggregated and deducted from the market data revenue collected pursuant to the Nasdaq UTP Plan ("Plan");2 and (3) prohibit the launch or continuation of Nasdaq trading by any market that fails to protect investors.3 CSE welcomes Commission review of the regulatory issues raised by Nasdaq in its petition. CSE also appreciates being provided this opportunity to correct the record and present our views.
Since CSE launched its Nasdaq securities program in February 2002, significant trading volume has moved away from Nasdaq. With approximately 14% of trading volume on CSE, 15% on PCX/ARCA, 10% on the NASD's Alternative Display Facility ("ADF"), and as little as 17% on Nasdaq's SuperMontage system, investors are, for the first time, reaping the benefits of true competition and choice in the execution of their Nasdaq securities trades. Trading costs are lower,4 execution quality is higher, and investors may now select from distinct execution alternatives that best meet their execution desires. To quote Hamlet, "'tis a consummation Devoutly to be wish'd."5
Nasdaq, however, sees things differently. Rather than suffer the slings and arrows of real competition, Nasdaq portrays the recent market segmentation as having, "created an inequality of regulation that if uncorrected could undermine investor confidence in the nation's second largest stock market, . . ."6 Citing the absence of a prophylactic short sale rule on competing markets and claiming that exchanges lack the information necessary to detect fraud and other violations in their markets, Nasdaq seeks Commission relief under the guise of investor protection.
CSE disagrees with Nasdaq's approach, arguments and underlying assumptions and assertions of fact. Indeed, we question whether Nasdaq's actions are motivated as much for the greater public good, as they are to secure a bailout of its excessive regulatory contract with the NASD. In our view, the urgency in its call for changes to the regulatory structure and cost allocations is based on finances, not regulatory crisis.7 The flow of volume away from Nasdaq to other markets has caused Nasdaq severe financial loss that has led Nasdaq down a desperate road of exaggeration, mischaracterization and willful distortion of fact. Unable or unwilling to compete on the basis of lower costs, superior products, services, or business acumen, Nasdaq has resorted to compete through a campaign of denigrating the intra- and intermarket regulatory structures of the U.S. securities markets . . . but only as applied to Nasdaq securities.
We object to Nasdaq's continued attempts to cast CSE's and other market's regulatory programs in a negative light. We note that our market regulation program is subject to the same standard of scrutiny by the Commission's Office of Compliance, Inspections and Examinations ("OCIE") as Nasdaq's is. Given that our statutory requirements are virtually identical, and we are all subject to the same OCIE oversight, we fail to see the basis for Nasdaq's claims that competitive trading of Nasdaq securities has created "unequal and inadequate regulation by some markets[.]"8
In making these statements, Nasdaq has attempted to call into question the integrity not only of the markets, but also of the Commission's oversight of those markets. By stating that it "is concerned that markets have begun trading Nasdaq securities without the resources, rules or regulatory infrastructures needed to protect investors[,]" Nasdaq is actually alleging that the Commission has failed to perform its duties to oversee the markets.9 Although it seems apparent to us that Nasdaq's statements are competitively motivated, that does not justify these backhanded attacks on the integrity of the exchanges and the oversight capabilities of the Commission.
Moreover, by alleging that there is a "regulatory crisis," Nasdaq seeks unduly to prey on the Commission's and the securities industry's concern with investor confidence. As Chairman Donaldson noted in his letter of March 11, 2003, "SROs must lead the way in restoring investor confidence."10 CSE believes that this requires SROs to conduct themselves in a manner becoming federally registered markets. Nasdaq, by distorting the regulatory programs of competing markets in an effort to obtain Commission protection from competition, fails this simple test.
Putting aside Nasdaq's actions and motives, we do think that Nasdaq's Petition raises some important issues and we appreciate the opportunity to discuss them. CSE supports requiring uniform standards for order audit trail collection and automated surveillance systems. Moreover, CSE supports uniform trading rules (although the short sale rule is a poor example) that protect customers. CSE believes that the single greatest competitive disadvantage among the markets trading Nasdaq securities is Nasdaq's monopoly on trading without price/time priority. CSE has sought uniformity in price/time priority between CSE and Nasdaq for nearly two years while, ironically, being opposed by Nasdaq.
On a more basic level, Nasdaq's Petition questions the efficacy of the current mechanism for surveilling and prosecuting intermarket manipulative activities. For years markets trading the same securities have coordinated their surveillance and enforcement programs to address manipulation and other securities law violations. For the last 20 years the Intermarket Surveillance Group ("ISG") has been the primary mechanism for that coordination. The Commission, at the urging of Nasdaq, requests comment on whether intermarket trading activities in Nasdaq-listed securities should continued to be regulated through the coordinated efforts of the markets or whether the regulation should be consolidated into a single entity. To be clear, CSE continues to support coordinated regulation for Nasdaq securities, as well as for New York Stock Exchange- ("NYSE") and Amex-listed securities and their derivatives products (collectively referred to herein as "national market system securities"). CSE believes, as it stated in our response to the Nasdaq White Paper, that coordinated regulation is "organized in a manner that fairly distributes responsibilities and costs among the various self-regulatory organizations. . . . Nasdaq fails to make its case for a fundamental shift in the manner in which self-regulatory organizations operate. Without reasonable proof that Nasdaq's motives are anything more than pecuniary and that the existing self-regulatory and intermarket surveillance systems are fundamentally flawed, we see no reason for such a radical restructuring that so blatantly favors Nasdaq/NASD's competitive position."11 Before taking the step of redefining our regulatory infrastructure, we believe any "regulatory gaps" to which Nasdaq eludes must first be identified and understood.
Prior to addressing the specific questions set forth by the Commission in the Concept Release, CSE wishes to emphasize its concern with Nasdaq's repeated attempts to distort the Exchange's regulatory program. The Petition is but a part of a continuing pattern of actions that date from the inception of CSE's Nasdaq-listed securities trading program in February 2002. In letters to the Commission and other government agencies, proposed rule changes filed with the Commission, the Nasdaq White Paper and now its Petition, Nasdaq has repeatedly denigrated CSE's regulatory program without any factual basis.12
Nasdaq has made such claims as: "CSE has in place few if any of the safeguards necessary for detecting best execution, Manning or Order Handling Rule abuses";13 "CSE has neither OATS [NASD's Order Audit Trail System] data nor ACT data that would allow its regulatory staff to conduct the type of in-depth market oversight that is necessary to police an electronic competing dealer system. . .";14 ". . . CSE has attempted to copy the Nasdaq competing dealer regulatory structure to attempt to attract ECNs [Electronic Communication Networks] while lacking the resources and many of the important investor protections that are necessary for adequately regulating such a market."15 All of these statements are made without the support of any factual information.16 Nasdaq admits as much. "[W]e do not believe that an adequate independent assessment has been made to determine whether FOS [CSE's Firm Order Submission Audit Trail] is sufficient for the proper surveillance of the CSE as it enters that market for Nasdaq securities."17
The truth is an independent assessment has been made. OCIE has examined CSE's regulatory program overseeing trading in Nasdaq securities, including our FOS system. Indeed, CSE has worked with OCIE at every stage in the development and implementation of CSE's Nasdaq trading program to ensure that OCIE is fully informed regarding the regulatory capabilities of CSE. If CSE lacked adequate mechanisms to surveil for, detect, and prosecute trading abuses in Nasdaq securities, CSE is confident OCIE would have brought such matters to CSE's attention. Again, Nasdaq's claim of no independent adequate assessment implies that the Commission has not performed its statutory role.
With regard to CSE's FOS in particular, Nasdaq speculates that CSE does not trace orders entered through its ECN members, i.e., from the Island ECN to the subscriber generating the orders, and is thus "deprived of the transparency that is required for adequately surveilling the trading activity of [its] members."18 Nasdaq is wrong. CSE does trace these orders through our FOS system. Nasdaq bases this incorrect supposition on the assumption that CSE does not possess a Commission-approved order audit trail comparable to its and NASD's combined OATS and ACT tools.19 Again, Nasdaq is wrong. CSE's FOS is a Commission-approved order audit trail, the regulatory data submission requirements of which are contained in CSE Rule 4.2, Interpretation .02.
In introducing our FOS in 1995, CSE was the first exchange to develop an electronic order audit trail, a system that captures the entire history of customer and proprietary orders from arrival in the members' order handling systems through display, execution, cancellation, or routing to another market. CSE believes that our order audit trail is second to none. Indeed, CSE's FOS provides more order audit trail data than NASD's OATS, which Nasdaq claims to be the most complete audit trail of any market. OATS does not include execution information (it is contained in Nasdaq's ACT database); FOS does. OATS fails to capture order information for executions in NYSE-listed securities executed on Nasdaq; FOS does.20 OATS fails to capture order information for executions of Nasdaq-listed securities executed on other markets; FOS does.21 OATS fails to capture proprietary order information either executed on Nasdaq or routed to another market; FOS does.22
Nasdaq is well aware of CSE's audit trail system, yet insists on distorting the true nature of FOS. Despite the fact that CSE had an existing audit trail and even offered assistance to Nasdaq and NASD when creating their own,23 Nasdaq continually fails to acknowledge the existence of CSE's FOS. In commenting on CSE's decision to begin trading Nasdaq securities in a letter dated January 9, 2002, Nasdaq claimed that CSE had no OATS-like data.24 CSE responded by letter dated January 24, 2002 reminding Nasdaq of our FOS system and the assistance CSE had offered in developing and implementing OATS.25 Again, in response to Nasdaq's implications in its January 24, 2003 white paper that preceded the instant Petition, CSE reminded Nasdaq of our FOS system by letter dated February 19, 2003. Despite our repeated efforts to point out this oversight, Nasdaq continues to make claims it must know to be false. The latest case in point: in its Petition, Nasdaq claims that the FOS is "a voluntary system used primarily for settling commercial disputes between traders rather than an integrated means for surveilling trading on the CSE." This is simply absurd.
We recognize that with the introduction of intermarket trading in Nasdaq-listed securities comes the need for additional, although not unique, cooperation and coordination between and among the SROs. CSE commits to working with the Commission and the other SROs to evaluate the regulatory issues and implement whatever is needed to maintain constructive and effective intermarket regulatory systems.26 In doing so, we are hopeful that Nasdaq will end this deliberate distortion of CSE's audit trail system, as well as other regulatory practices at CSE. CSE looks forward to the day when Nasdaq embraces competition based on business practices and leaves the oversight and criticism of regulation to the Commission.
RESPONSE TO COMMISSION'S REQUEST FOR COMMENT
A. Uniform Trading Rules
Exchange-listed securities and equity options have traded on multiple markets for years. By comparison, the underlying Nasdaq-listed securities had traded almost exclusively on the Nasdaq market until recently. Given the limited non-Nasdaq market volume, Nasdaq enjoyed a position under which it was able to function as a monopoly market, exclusive securities information process ("SIP") and, through its affiliate NASD, the regulator responsible for overseeing the vast amount of trading in Nasdaq-listed securities. Although the national market system rules applied, there was no need for it to act to protect its share of the market and little conflict of interest in it operating as the exclusive SIP. Similarly, although ISG procedures applied, there was little need for NASD to actively coordinate with other markets trading Nasdaq securities given the limited non-Nasdaq volume.
With the proliferation of markets trading Nasdaq securities on an unlisted trading privilege basis, times have definitely changed. The shift in trading away from the Nasdaq market to CSE and other lower cost markets has brought about a significant decrease in revenues for Nasdaq. Besides decreased volume, Nasdaq is also faced with the prospect of decreasing its revenues per trade in order to complete with the markets that offer lower costs. As result of the competition, the monopoly pricing structure Nasdaq formerly enjoyed is failing. This seems to have been particularly difficult for Nasdaq, who has in place a fixed cost regulatory services arrangement with NASD. According to Nasdaq, this contractual burden has significantly hindered its ability to compete with the growing number of alternative trading venues.27 But rather than renegotiate its service agreement with NASD, Nasdaq has resorted to a campaign of denigrating the integrity of its competitors, the intermarket surveillance system and, by implication, the Commission.
It is Petition, Nasdaq argues there is unequal and inadequate regulation of the trading in Nasdaq securities. It claims that competing exchanges are "unaccustomed to operating in the decentralized environment unique to Nasdaq[.]"28 It also claims that the other markets "slash execution and reporting fees to lure trading away from Nasdaq [and, in to] hold down their fees they must avoid incurring new regulatory costs, such as the costs of properly adopting their existing rules and systems to the unique structures and patters of Nasdaq trading."29 Because of these alleged inequalities, Nasdaq argues for a shift from coordinated regulation to a single regulator model.
For the reasons we set out below, CSE does not believe there is an inequality of regulation for the Nasdaq securities, nor do we believe that Nasdaq subsidizes our market. Moreover, it would be premature to make any modifications to the existing intermarket surveillance model before any perceived regulatory gaps have been clearly identified and understood.
Q1. Do commenters agree with Nasdaq that there is unequal regulation of trading in Nasdaq securities?
CSE disputes Nasdaq's contention that there is unequal regulation of trading in Nasdaq securities. Unlike Nasdaq, CSE believes that denigrating regulatory programs of other markets for which we have little or no knowledge is wrong. Although CSE can only speak with regard to regulation on CSE, we believe that we have developed and administer a comprehensive program.
Regulatory authority over the markets is divided between the Commission and the markets' respective SROs. These SROs consist of national securities exchanges and associations to whom Congress has delegated authority to adopt rules over the conduct of their members and to enforce compliance with those rules and the federal securities laws. When it comes to regulation of trading activity, the provisions of Section 6 of the Act, which applies to the conduct of exchanges, and Section 15A, which applies to the conduct of associations, are virtually identical. Under these provisions, a market cannot be registered unless the Commission determines that its rules, among other things, are "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, . . . and, in general, to protect investors and the public interest[.]"30 These provisions also provide that a market's rules provide that "its members and persons associated with its members shall be appropriately disciplined for violation of the provisions of [the Act], the rules or regulations thereunder, or the rules of the [market.]"31 Pursuant to these requirements, each market has an obligation to develop and administer a comprehensive program for the surveillance and enforcement of these rules, a program that the Commission is required to oversee for effectiveness and completeness.32
The Commission is the only entity that can determine the quality of any SRO's regulatory program.33 If a market fails to meet, maintain and consistently apply these standards, OCIE staff should detect the failure and, subject to the severity of failure, either correct the inadequacy or refer the SRO to the Commission's Division of Enforcement for disciplinary action, such as the Commission's 21(a) Report pertaining to the Nasdaq market. If markets were permitted to operate with inadequate regulation, OCIE would not be doing its job. Nasdaq's claim of inadequate regulation is then by implication a condemnation of the Commission's oversight function and in particular of OCIE's examination program. Having been subject to OCIE scrutiny from the beginning of our Nasdaq trading program, CSE welcomes the input of the Commission on our regulatory program. Because of this, CSE strongly disagrees with Nasdaq's implication that the Commission has permitted markets to operate with inadequate regulation. CSE believes that our regulatory program far exceeds the statutory requirements. We believe the same is true of other markets. If regulatory inadequacies do exist we are confident they will be discovered and corrected through the Commission's oversight program.
Q2. Should all exchanges and associations trading Nasdaq securities have rules requiring detailed audit trail information?
CSE emphatically agrees. Having pioneered order audit trail development with our FOS, CSE regards order audit trails as fundamental to any market's regulatory program. The ability to capture an electronic footprint covering the entire life of customer or proprietary orders held or generated by CSE members permits the Exchange to comprehensively monitor for violative conduct. Additionally, this process can be automated to handle high volumes at reasonable costs.
CSE recognizes, however, that the types and format of data required may vary by the particular market's structural needs and system designs. For example, CSE's FOS is more comprehensive than NASD's OATS, yet CSE does not believe that NASD should be required to model its system after ours. This is why we reject Nasdaq's notion that ISG's database is ineffectual because it is in a different format than that employed by NASD.34 Nonetheless, CSE understands the cost implications of multi-market members having to comply with multiple formats. To resolve this concern, CSE believes that markets should work within ISG to determine certain format standards that would facilitate data submission by multi-members on a cost effective basis.
CSE therefore believes that the Commission should require that markets have in place internal audit trails sufficient to track the lives of orders from inception to execution. While markets should retain the flexibility necessary to design the specific features of their internal audit trials in a manner that provides for effective regulatory surveillance and enforcement, CSE believes that some cross-market standardization developed through ISG may best service the industry going forward.
Q3. Should all exchanges and associations trading Nasdaq securities be required to automate their surveillance and examination of Nasdaq trading on their markets?
Each SRO should be able to meet the regulatory requirements of the Act, as interpreted by OCIE, through whatever means deemed appropriate by the SRO. The means employed need not be uniform -- the mix of automation and manual processing will necessarily vary by SRO given its particular infrastructure. Naturally, CSE believes that SROs will gravitate to automated processing because of the ability to scale up regulatory capacity as volume grows. Technology has permitted regulatory costs per trade to fall while processing far more data than ever before. In today's cost-conscious environment, SROs that fail to automate surveillance processes are likely to impose excessive costs on their members.
Q4. Should all exchanges and associations trading Nasdaq securities have similar rules to regulate short selling?
CSE believes that all SROs should surveil for, detect and prosecute manipulative short selling. That said, CSE remains concerned with the unintended consequences inherent in the application of prophylactic short sale rules. Because such rules impede efficient as well as manipulative trading activity, CSE believes automated surveillance programs that focus on potential patterns of manipulation may better serve today's markets while protecting issuers and investors. As the Commission noted its concept release on short selling, "[s]ince the adoption of the short sale rule, securities trading has increased drastically in volume, velocity, and complexity. There have been substantial improvements in market transparency and surveillance mechanisms. Short sale regulation, however, has remained fundamentally unchanged."35
Rule 10a-1 was adopted under Section 10(a) of the Act to prevent accelerating declines in a security and manipulative trading known as "bear raiding."36 As currently written, Rule 10a-1 applies to short sale activity for all exchange-listed securities but does not apply to Nasdaq-listed securities. Rather than use this uniform short sale rule, the NASD developed its own "bid test" rule, NASD Rule 3350, which prohibits short sales at or below the current best (inside) bid when that bid is lower than the previous bid. Moreover, unlike Rule 10a-1, NASD exempts Nasdaq market makers from the prohibitions of Rule 3350.
Nasdaq claims that "unequal regulation" of short sales in Nasdaq-listed securities is developing. This concern appears to exist because, while the trading of Nasdaq-listed securities on the Nasdaq and ADF markets is subject to NASD's short sale rule (NASD Rule 3350), the trading of those same securities on an exchange market are not subject to short sale regulation under Rule 10a-1 or NASD Rule 3350. However, this should not be mistaken to mean there is no short sale regulation on CSE. First, CSE enforces Rule 10a-1 for exchange-listed securities. Second, even without the application of the specific prophylactic, mechanical requirements for Nasdaq securities, the abusive activity Rule 10a-1 is designed to prevent -- short selling at successively lower prices and accelerating a declining market - is prohibited under the general provisions not only of Section 10(a) of the Exchange Act, but also under CSE's rules on just and equitable principles of trade (CSE Rule 3.1), against manipulative, deceptive or other fraudulent devices (CSE Rule 3.3), and against market manipulation (CSE Rule 12.1).37 As a result, if abusive short selling activity in a Nasdaq security should occur on CSE, we would view that activity as being violative of the Act and our rules and would prosecute the matter.
In the absence of a mechanical rule, CSE is permitted to focus its regulation of short sales on the illegal conduct, i.e., manipulative short selling, rather than enforcement of rules that restrict manipulative trading at the expense of efficient trading. Particularly in the current decimal environment with flickering quotation changes and penny spreads, CSE believes Rule 10a-1 is overly restrictive. NASD Rule 3350, while less restrictive, inappropriately creates different rules for public customers and Nasdaq market makers to the advantage of the market makers. CSE believes short sale regulation should be uniform for all market participants. That is why CSE believes that regulating manipulative trading whether by market maker or public customer achieves the goals of the rules without the unintended consequence.
Our model is analogous to the approach taken for insider trading and, in fact, overlaps in many surveillance-related respects. By not specifically defining a tick test or a bid test, or a multitude of exclusions from those tests, the scope of what may be considered violative activity is not unnecessarily restricted. At the same time, legitimate trading activity that would otherwise be prohibited by the very technical nature of the tick test and bid test is permitted to take place. CSE has developed surveillance procedures to monitor for and detect potentially abusive short sale activity in Nasdaq securities, and we continue to evaluate ways of further enhancing those procedures as more and more Nasdaq trades occur in our marketplace.
Given these facts, it seems to us Nasdaq's assertion that "several UTP exchanges trade Nasdaq issues with no short sale regulation whatsoever" is incorrect.38 At least with respect to CSE, this claim is based on a fundamental misunderstanding of CSE's rules and surveillance program. Be assured, abusive short selling activity is not permitted, and certainly not encouraged as Nasdaq suggests of others, on our marketplace.
We support and would like to participate in discussions on the need to revise the short sale rule, as applied to Nasdaq-listed securities and as applied generally. CSE believes that a more general rule against short selling activity combined with the application of dynamic surveillance parameters is actually a better alternative than the more technical approaches taken by Rule 10a-1 or NASD's Rule 3350.
Q5. What other trading rules should be uniform across all markets?
As indicated above, CSE supports uniform rules requiring audit trail submission by SRO members. CSE also supports uniform customer execution rules. In that vein, however, CSE believes that the Commission should seek to harmonize requirements related to exchange and association registration so as not to promote an artificial regulatory advantage between competing markets. This is consistent with the requirements of the Act pertaining to fair competition.39 We believe that the Commission has done well in this area, but feel that one lingering distinction exists: the lack of price/time priority in association markets while there remains an apparent mandate of price/time priority in exchange markets.
The application of the price/time priority distinction in today's electronic environment renders perverse results: a national market system security when traded on an exchange market, such as CSE, must be subject to price/time priority, while the same security when traded on an association market, such as Nasdaq, is not. Market makers and ECNs participating on association markets are thus permitted greater execution opportunities and therefore advantaged vis-à-vis participants on exchange markets.
Nasdaq's status as an association affiliate should carry no weight in the analysis of price/time priority. As time has passed and technology advanced, the operational distinctions between exchange markets and the association markets have blurred. The Nasdaq market has evolved into an electronic trading facility comparable to that of the traditional floor-based exchanges.40 On the other hand, CSE and other markets have eliminated the need for a physical trading floor in favor of competing dealer, electronic trading environments more akin to Nasdaq. Contrary to Nasdaq's assertions, CSE adopted a competing dealer model in 1991 as part of its pilot preferencing program. Since then, CSE has operated in a manner that is nearly identical to Nasdaq, but for the requirement of price/time priority. CSE has demonstrated that any market, whether it be exchange or association, can thus take on the characteristics of being floor-based or electronic, specialist or competing market maker. And, with unlisted trading privileges, the same security and/or its derivative products can be traded in any of these markets, subject to that market's particular trading rules. It matters not that a security is listed by an exchange or an association.41 Despite these facts and that exchanges and associations are subject to virtually identical regulatory requirements, the two are not able to offer the same execution alternatives. The markets thus do not operate on a level playing field.
At least with respect to national market system securities and, most particularly Nasdaq securities, the Commission must make a determination of whether or not price/time priority is a necessity. If the view is that price/time priority provides a necessary protection to public investors, then we believe Nasdaq and other association markets should no longer be able to operate in an environment where this protection is not offered, particularly in the case of national market system securities. If, on the other hand, price/time priority is not a necessary ingredient to protect public investors (as the Rule 11A1-5 statistics for Nasdaq seem to demonstrate), then there should be no need to maintain the artificial distinction between the competing markets. If it is good for investors on the Nasdaq market, exchanges should not be prevented from offering the same flexibility in execution alternatives in their markets.
Since October 31, 2001, CSE has had a rule filing pending with the Commission to introduce a Voluntary Book, which would create a trading environment on CSE for Nasdaq securities that is parallel to that which is currently employed by Nasdaq.42 CSE believes that the introduction of a Voluntary Book will enhance competition by promoting increased liquidity and greater opportunities for members and their customers to obtain best execution. In that regard, we urge the Commission to take action to approve our rule filing as a first step toward providing equal regulation among markets trading Nasdaq securities.
Q6. How should the Commission address any regulatory gaps that can arise when trading in the same security is fragmented across different SROs?
To the extent that any regulatory gaps exist, which CSE is not certain is the case, they must be identified and then addressed by the markets. With respect to any gaps that may arise as the result of segmentation of trading in multiple markets, we believe it is incumbent upon both the markets trading the securities and its derivatives, in their roles as regulators, and the Commission, in its role as overseer, to identify those concerns and coordinate with each other to address them.
The Commission can best make sure each SRO that trades Nasdaq (or any other) securities fulfills its statutory obligations through maintenance of its existing oversight programs, particularly in light of the significant increase in Commission budget recently approved. To the extent intermarket regulatory issues are involved, the Commission can best facilitate the necessary coordination by urging ISG to file its agreement as a national market system plan. The Commission may then oversee that ISG implements any changes to its procedures or system databases that the Commission deems necessary for providing effective coordinated regulation. In this way, the Commission may resolve perceived regulatory gaps while preserving the innovation and cost effectiveness of coordinated regulation.
Q7. To what extent is ISG a useful mechanism for coordinating intermarket regulatory efforts? Does ISG fully address the regulatory gaps Nasdaq contends exist? Does the fact that the Commission does not have direct oversight of ISG limit the sufficiency of the ISG framework in ensuring adequate regulation of violative conduct in the trading of Nasdaq securities that can occur across markets, such as insider trading or certain market manipulations?
CSE believes that ISG remains the only entity that can function as a mechanism for coordinating intermarket regulation. To preserve self-regulation and the attendant benefits of innovation and cost-effectiveness, CSE believes that the Commission should reject Nasdaq's efforts to install NASDR as the consolidated regulator for intermarket surveillance.
Under self-regulation, the exchanges and associations each monitor trading activity that takes place in their individual markets, whether it be in NYSE-, Amex- or Nasdaq-listed securities or equity options. The purpose of this surveillance is to detect unusual or questionable trading activity, for example illegal insider trading and trading designed to manipulate prices. When it comes to understanding how the markets that trade common securities or derivatives work together to provide comprehensive intermarket surveillance, perhaps NASD, although contrary to Nasdaq's current position, summed it best when it stated:
No one regulator has complete oversight over all trading activity, even in the stocks listed in their own market. The stocks may be traded on other markets. Furthermore, with the advent of derivatives such as futures and options, trading activity in one market can be used to manipulate the price of the underlying security in another market. For this reason, the Intermarket Surveillance Group was formed to enable SROs to share surveillance information and coordinate efforts to detect cross-market manipulative trading.43
When it comes to addressing matters related to intermarket surveillance and regulation, ISG offers a forum that was established specifically for the purpose of fostering this type of communication between SROs and with the Commission. Among ISG's initiatives is the generation of a consolidated equity audit trial for use by the participant SROs. In addition, in connection with the routine sharing of information, the ISG participants have defined certain types of violations that can occur across markets and have allocated surveillance/regulatory responsibility for such activity to the appropriate market(s). This enables participants to avoid duplicative efforts while continuing to ensure effective intermarket surveillance.44 For example, each market conducts surveillance for insider trading activity. In this manner, each SRO reviews activity in a security or securities on its own market and in relation to the overall market, on the whole providing breadth and depth to the analysis.45 This coordinated approach is designed to provide comprehensive coverage and alleviate the potential for regulatory gaps in intermarket surveillance.
Before initiating an investigation in a particular security based on analysis or other referral source, ISG protocol generally requires that an SRO notify all other markets trading the same security (or related options) so as to coordinate investigations with other markets that may wish to investigate the same activity based upon their own surveillance analysis. This way the SROs can collectively determine which market(s) should take the lead in the investigation, foster communication and avoid multiple requests to issuers and/or dealers for the same information.
The need for coordinated surveillance, and the ISG's ability to fulfill that necessity, was recently examined by the Commission in the context of single stock futures.46 As security futures are a surrogate for the underlying securities, Congress has specifically required that exchanges and associations trading these products have procedures in place for coordinated surveillance with other markets on which security futures products trade, any market on which any security underlying the security future product is traded, and other markets on which any related security trades in order to detect manipulation and insider trading.47 In interpreting the statutory requirements for coordinate surveillance, the Commission and the Commodities Futures Trading Commission (collectively the "Commissions") stated:
[T]he Commissions interpret the statutory requirement for coordinated surveillance to mean that if an exchange or association is a Full Member of the Intermarket Surveillance Group (`ISG') or has the ability to obtain all information that a Full Member of the ISG is currently able to obtain from both current and former members, including, among other things, the ability to obtain market surveillance reports or information, and information relating to investigations, then that market would meet the statutory requirement for coordinated surveillance. . . . For an exchange or association to satisfy the statutory requirement that `procedures be in place for coordinated surveillance,' the Commissions stated . . . that they believed it was `essential that all such exchanges and associations be Full Member of ISG.' In view of the role that the ISG plays, the Commissions stated their belief that the ISG should grant full memberships to all national securities exchanges and national securities associations . . . upon a good faith showing that the entities meet the criteria for full membership.48
The Commissions further stated:
ISG was created under the auspices of the SEC as a forum to ensure that national securities exchanges and national securities associations adequately share surveillance information and coordinate inquiries and investigations designed to address potential intermarket manipulations and trading abuses. Full Members routinely share a great deal of surveillance and investigatory information, and the SEC continues to believe that this framework has proven to be an effective mechanism to ensure that there is adequate information sharing and investigatory coordination for potential intermarket manipulations and trading abuses.49
Within just the SEC's jurisdiction, all national securities exchanges and associations are Full Members of ISG. In fact, the Commission required new markets to become ISG members as a condition of registration.50 That ISG was not established under Section 11A or 17 of the Act (it is governed by a written agreement signed by each of its members) in no way impacts the sufficiency of the ISG framework, although it reduces the Commission's oversight authority over ISG. Aside from the fact that the Commission has clearly recognized the important position ISG holds in the regulatory framework for the U.S. securities markets,51 the Commission has residual jurisdiction over each of the Full Members of ISG in their individual capacity as SROs.
As ISG indicates in its response to Nasdaq's Petition, ISG believes that "Nasdaq's dismissal of ISG's role in providing a framework for cooperation among the ISG participants is shortsighted and ignores the significant advances in coordinated regulation implemented by the ISG participants over the twenty years since its inception."52 ISG disputed Nasdaq's claims that ISG hinders effective intermarket regulation. Indeed, ISG states, "[n]o other market [including the NASD, an ISG participant and Nasdaq's regulator,] has raised an issue with respect to the delivery of the Equity Audit Trail or articulated a view that the few days that it takes for the clearing data to be incorporated into the Equity Audit Trail presents an impediment to effective regulation."53
CSE fully supports ISG's position. In bypassing ISG, Nasdaq seeks to promote its affiliate regulator, NASDR, as overlord for markets trading Nasdaq securities. Nasdaq did so without ever raising its concerns with ISG to determine whether the current framework could be modified to rectify Nasdaq's perceived regulatory gaps. Surprisingly, Nasdaq seemed woefully uninformed about ISG. In commenting on Nasdaq's White Paper to the Nasdaq UTP Plan Operating Committee, Nasdaq representatives expressed complete ignorance of what entities make up ISG and what role ISG plays in the securities industry. CSE wonders how Nasdaq can disparage the functioning of ISG when it had not taken the time to understand its role. CSE and ISG believe that Nasdaq should meet with ISG to address Nasdaq's concerns. Until this is done, the Commission should reject Nasdaq's proposals as self-serving and premature.
Q8. Are there models sufficient to address potential concerns raised by fragmentation of regulation by multiple SROs trading Nasdaq securities?
We believe that the current model of self-regulation, coupled with ISG for coordination and cooperation and Commission oversight, is the best means for addressing intermarket surveillance of all national market system securities.
CSE believes that an effective regulatory framework for intermarket trading must include:
- Joint Jurisdiction: Given the legitimate interests of each market, intermarket trading should be subject to joint regulation. This type of regulation recognizes the interrelation between markets and the need for all SROs with expertise and legitimate interest to participate in a security's regulation. We believe this is the more modern view of regulation, as compared to the dictatorial notion that a security is listed by the Nasdaq market should be regulated by NASD, even though it is traded on multiple markets. The framework we employ must recognize the legitimate interest of these SROs in regulation. Because Nasdaq securities, and their derivatives products, are traded across multiple markets, exclusive jurisdiction is ill advised. Shared jurisdiction and joint regulation recognize that each SRO is best qualified to apply the key components of the rules it administers and allow the SROs to coordinate efforts through ISG to ensure efficient market regulation that is comprehensive and not duplicative or overly burdensome.
- Fair Competition: The regulatory framework must also be one that encourages fair competition among markets. The framework should not give any type of market an artificial competitive advantage, as for example the lack of price/time priority in the association markets does. Competition should instead be based on better products, services and prices, not regulatory difference.
- Protect Investors & Maintain Market Integrity: The regulatory framework must maintain the markets' ability to protect investors and the integrity of the markets in which they trade. Audit trails, coordinated surveillance and OCIE oversight are all necessary to effectively regulate markets and protect investors. CSE does not support any move to take away SROs' existing authority over their members and trading in their markets by positing that authority with a competing market's SRO. Investors have strong expectations about the integrity of markets, and the resultant investor confidence fuels the success of those markets. The Commission should not restrain an SRO's ability to participate in the safeguarding of intra- and intermarket integrity through participation in ISG. CSE believes that the ISG system provides a means for markets to collectively determine innovative ways to coordinate regulatory efforts, assuring comprehensive surveillance and avoidance of duplication.54
Q9. Are there advantages or disadvantages to a single market regulator with regulatory oversight across all markets trading Nasdaq securities?
CSE believes the industry already has a single regulator in the form of the SEC. We believe the combination of industry oversight, backed by government power, provides the most efficient and effective means of regulation. It is the cornerstone of the U.S. securities infrastructure.
In the end, if the "single regulator" for Nasdaq securities is not the Commission, we presume it must be a registered exchange or association. As a result, it will always be a competitor seeking to regulate the business of its competitors. The suggested regulator, NASD, is the SRO of two competing markets, Nasdaq and ADF.55 Therefore, there exists an inherent conflict of interest both in terms of favoritism in regulation and in cost allocation. With respect to costs, we believe there would be no economies of scale achieved in adopting a single regulator. CSE is not alone in this view. The Ad Hoc Committee of the Securities Industry Association has stated: "The Ad Hoc Committee does not support the single SRO model because it fails to retain valuable aspects of the current regulatory system. In particular, because market regulation would be completely divorced from the relevant markets, the regulators familiarity with the market will be lost. The Ad Hoc Committee also recognizes that because the single SRO is further removed from real industry concerns, there is a greater risk of bureaucratic tendencies and a greater risk of becoming a superfluous layer of regulation that adds little to the oversight provided by the SEC."56
With multiple regulators, the vast amount of trading information is analyzed from different perspectives, which provides an added layer of protection to investors. With a single regulator model, that dynamic fabric is lost. Moreover, we believe that only the individual markets possess the expertise and intimate knowledge of their own market models and the trading activity occurring in their markets. That Nasdaq believes its particular competing market maker model impacts trading Nasdaq securities on another market, illustrates its a lack of knowledge of the other market models.57 Even should a single regulator be assigned the responsibility of surveillance, if potentially violative activity involves the CSE market, our members or the securities we trade, we have a legitimate interest in being involved in the surveillance, investigation and enforcement of that activity.
Q10. Should a competitive bidding process be required to determine which entity will serve as the single regulator?
We do not believe there should be a single regulator. However, in discussing a competitive bidding process, several questions arise: Who would be the party or parties considering these bids, the SEC or the markets that would be required to utilize the services of this single regulator? We believe the answer should be the later, subject to Commission approval, of course.
In recognizing that cost is a factor, it seems the markets should be able to determine whether it is more cost efficient for them to perform the function themselves on a coordinated basis versus requiring that a single regulator perform the function. CSE is concerned that the Commission could impose monopoly pricing on the industry by imposing a single regulator, regardless of the fact that a competitive bidding process is used. If the Commission would mandate utilization of a single regulator, it would actually take away the cost analysis that would normally occur with regard to Section 11A, 17d-1 appointments, 17d-2 arrangements, regulatory service agreements and/or performing a function internally. Under each system, a market generally makes an economic analysis of which means is the most effective and cost efficient. In this respect, we believe that utilization of a common regulator should be a decision made by the markets on a voluntary, perhaps bi-lateral basis.
B. Allocation of Regulatory Costs
Nasdaq makes an assumption that markets that offer lower costs to their members must be doing so at the expense of under funding regulation. Based on this assumption, Nasdaq asks the Commission to establish "an equitable allocation of regulatory costs across markets to ensure that price competition does not come at the cost of adequate regulation."58 Nasdaq also contends that it subsidizes other markets because it funds NASD's OATS to collect trading information from all NASD members whether or not the trades are reported to the Nasdaq market.59 Based on these assertions, Nasdaq contends that the fairest way to allocate regulatory costs is to aggregate the markets costs and deduct that amount from market data revenue collected from the Nasdaq UTP Plan.
We disagree with Nasdaq's contentions and proposed solution. A market can offer lower costs to its members while at the same time meeting its statutory obligations as an SRO. The two are not directly correlated. Indeed, CSE offers lower costs to our members, yet spends more per member on regulation than Nasdaq. There is no subsidization here.
In addition to performing their self-regulatory functions, markets do legitimately compete for business. However, in the Petition, Nasdaq is asking the Commission to forsake the best interest of investors and the national market system so that the Nasdaq can compete as an exchange. The Act requires that markets have the capacity to carry out their obligations to perform as an SRO, not that other markets shoulder that burden. Each market should bear the costs of regulating its own market. Nowhere does the Act instruct the Commission to put the interests of Nasdaq above the interests of other markets and investors.
Q1. Should proceeds from the Nasdaq UTP Plan be withheld to pay for regulatory costs?
The simple answer is no! The proceeds from the Nasdaq UTP Plan should not be withheld to pay for the combined regulatory costs of the markets trading Nasdaq securities. However, before we can even get to this level of discussion, the threshold issue must be to identify what the perceived "regulatory gaps" are. Following that, a forum for addressing those identified gaps agreed upon. The regulators must then come to a general agreement on who is responsible for overseeing a particular market participant, security or transaction and for what behavior.
In the particular circumstances, CSE believes that Nasdaq's Petition to the Commission was, at best, premature. As the Commission is aware, in its White Paper and subsequent Petition, Nasdaq has suggested that there be a reallocation of regulatory responsibilities, and related costs, through the appointment of a single regulator to conduct intermarket surveillance under the Nasdaq UTP Plan. On March 5, 2003, the Plan Participants held an initial meeting to discuss the contents of the Nasdaq White Paper and the CSE Response. As the White Paper raised broader market structure issues related to intermarket surveillance and regulation, CSE attempted to invite the SROs that are not members of the Nasdaq UTP Plan (NYSE, CBOE and ISE) to participate in the meeting. Nasdaq, however, requested that these regulators not be invited. The Plan Participants also extended an invitation to NASDR, who declined by indicating they were not sure a regulator should be at the meeting. CSE objected to NASDR's absence because the basis for the Nasdaq White Paper was that gaps existed in intermarket regulation, which could only be identified and addressed by regulators. If NASDR representatives were in attendance, they could identify the issues, if any, that need to be covered and the Plan Participants could work to address them. Without NASDR's presence, however, a fair and full discussion on the matter was stonewalled, the process frustrated. As NASDR would not discuss the perceived problem with the Plan Participants,60 we expressed concern that the Plan was being used to claim Committee rejection so that Nasdaq could file the instant Petition. Obviously our suspicions were not unfounded.
Beyond identifying the issues, CSE and other Plan Participants raised questions on whether the Nasdaq UTP Plan was the appropriate forum. This is not necessarily to say that the matters discussed in the White Paper could not be addressed under Section 11A, it is just to say that the particular Plan was not the appropriate vehicle to consider the matter.61 CSE instead favored use of the ISG forum, which was established specifically to address matters relating to intermarket surveillance, has procedures and programs in place for the intermarket surveillance of Nasdaq securities, and has representation from all SROs. Nasdaq/NASD, however, declined to bring this matter before the ISG for consideration.
At the meeting of the Nasdaq UTP Operating Committee, many preliminary questions were asked. Plan Participants inquired whether the Nasdaq UTP Plan was the right forum and whether the appropriate regulatory interests of the Plan Participants and other markets were represented. Plan Participants also inquired what was unique about Nasdaq securities to warrant the distinct treatment from NYSE, Amex and options securities. With the transition to competitive trading, Nasdaq indicated that the opportunity to improve on the ISG model was presented. There was discussion of the single regulator model as an alternate approach, which Nasdaq appeared to present as an "all or none" package that, if rejected, would be taken to the SEC. Plan Participants expressed a desire that the SROs should consider a series of proposals and then determine the right approach to regulation. Before "reinventing the wheel," there was the underlying issue of identifying any regulatory gaps, the existence of which were in dispute. If there were any gaps, it was suggested that the discrete issue be addressed and a structural change to the self-regulatory system be considered separately. There was a generally willingness to move forward and consider Nasdaq's White Paper, but these threshold issues needed first to be considered.
Despite its representations that it would not, Nasdaq petitioned the Commission following this preliminary meeting. As a result, we are in a position of responding to issues Nasdaq raised in its White Paper that have not been fully vetted by the SROs, either through the Nasdaq UTP Plan Participants, ISG or any other forum.
Although there may be a belief that market data revenue was created to support regulation there is no statute, Commission rule or national market system plan provision that requires market data revenues to be the source of regulatory funding. If Congress had intended so, it would have included such provisions in the Act or delegated to the Commission the obligation to create rules governing market data revenue. Moreover, markets have found other sources for funding regulatory programs. For example, the NASD recently enacted a trading activity fee ("TAF") to support the regulation of its member activities. Market data revenue has been and should always be one of many revenue sources markets have to fund their operations.
Imposing Nasdaq's proposal, in CSE's view, would segregate one revenue source from others without any reasonable basis. Why not say all transaction fees should be used to fund regulation? Or more appropriately, apply listing fees to the aggregate regulatory costs because listing is what makes a security eligible for trading thereby leading to regulatory expense. Singling out market data revenue for distinct treatment, as Nasdaq proposes, places an undue burden on purchasers of market data by requiring them to finance a market's regulatory budget.
Moreover, requiring markets to collectively fund each others' regulation results in a subsidization of less efficient, more costly models by other markets. By definition, an allocation process would seem to assure that markets with the least efficient structures receive subsidization from others. In the case of Nasdaq and NASD, in particular, it would result in an improper shifting of the regulatory penalty imposed pursuant to the Section 21(a) Report. Plainly said, Nasdaq's proposal would amount to a bailout of NASDR's contract with Nasdaq. This contract, entered into during the height of the Nasdaq bubble when Nasdaq was 99% of volume, fails to reflect the current market environment or Nasdaq's current market share. As such, it presents a drain on Nasdaq's financial resources.
Because each market's financial structure differs as a result of its particular history, market structure, membership structure, offered services and competitive position, there is no specific requirement or single "blueprint" on how an individual market applies its revenues to cover its costs. As such, once market data revenue is distributed to a market under a national market system plan, it is the market's prerogative to utilize that revenue source, as with most other revenue sources, in whatever manner it believes fiscally appropriate. If a market so chooses, this would include, but not be limited to, using the monies to cover other operating expenses, to fund business and technological development, to reduce the cost of trading to members and, yes, to support regulatory programs. However, there is no specific requirement that these revenues be used to cover a market's regulatory costs, much less fund Nasdaq's regulatory contract.
Generally speaking, we are opposed to any requirement that the markets collectively fund each other's regulation. Such a structure would result in a subsidization of less efficient, more costly models by other markets. In the case of Nasdaq, in particular, it appears to focus on the costs it incurs to fund NASD's OATS to collect information from all NASD members, whether or not their trades are reported to Nasdaq. As it contains data from other markets, Nasdaq asserts that it is subsidizing the regulation of other markets. CSE strongly disagrees with this contention. Rather, OATS exists for the internal regulation of the Nasdaq market. Other markets should not be made to bear the cost of OATS. For the same reason, other markets should not be made to bear the cost of CSE's FOS system, which also contains order and trade information from other markets.
Moreover, OATS information regarding trades by CSE members that execute their trades on CSE is not useful to NASDR because of the absence of ACT data. In other words, NASDR requires members to submit data that must be stored but cannot be processed through NASDR automated surveillance systems. Nasdaq also claims that it subsidizes NASD member regulatory costs. For example, Nasdaq stated, "[a]lthough Cincinnati receives the market data revenue attributable to [Island's] trades, the NASD and Nasdaq bear the costs of receiving and storing Island's OATS data as well as the costs of regulating Island's conduct as an NASD member.62 We wonder what costs Nasdaq refers to given the fact that NASD has been charging a TAF for over 6 months.63 The TAF taxes transactions on CSE by common CSE/NASD members. The TAF is supposed to cover the member regulatory costs incurred by NASD. Even with this fee, however, Nasdaq claims to be subsidizing CSE. Again, this is absurd. CSE is the party subsidizing Nasdaq through its members paying the TAF.
Q2. Would Nasdaq's proposal to aggregate and deduct regulatory costs from market data revenue result in adequate regulation? If so, what costs would appropriately be considered regulatory costs and therefore, appropriately deducted from the market data revenue?
No, Nasdaq's proposal to aggregate and deduct regulatory costs from market data revenue will not address the adequacy of regulation. Nasdaq's proposal has nothing to do with adequate regulation. Markets will regulate themselves as they do today but any incentive to be cost effective would be lost. Rather, markets will have an incentive to spend as much as possible so as to reduce the current amount of market data revenue available to its competitors. Indeed, this is Nasdaq's primary motivation for the proposal. By forcing NASDR's regulatory contract to be paid from pooled market data revenue, Nasdaq is subsidized by other markets including CSE.
In determining whether there is adequate regulation within or among the markets, the focus should be upon the market(s) operational capacity to meet its obligations under the Act, both individually and overall. This is where the role of OCIE comes into play. The manner in which costs related to this infrastructure are funded, although relevant, is a separate analysis. The guiding principal is and should remain that the markets retain the freedom to determine how best to structure and fund their operations.
By contrast, the blanket shifting of regulatory costs that Nasdaq seems to be proposing would result in an unnecessarily complicated and arbitrary process and the resultant subsidization of markets by their competitors. More than an effort to seek a fair allocation of common regulatory costs, Nasdaq's proposal appears to be a blatant attempt to neutralize those markets that offer a lower cost structure. This is clearly anti-competitive. Nasdaq claims that markets offer lower fees must only be able to offer those lower fees by avoiding new regulatory costs, such as adapting existing rules and regulatory systems. This is not true. Again, the costs of our regulatory program are not relevant to the question of whether our regulatory program is adequate. Even though CSE has made the necessary modifications to our rules and regulatory systems to accommodate Nasdaq trading, our costs are still lower than Nasdaq. That being the case, we should not be prohibited from offering lower costs to our members.
Q3. Should other methods of fairly allocating regulatory costs be considered?
As is currently the case, the fairest allocation of regulatory costs are that each market should bear its own costs to regulate its markets. The allocation of costs is not the issue. The issue is whether a market is meeting its statutory requirements to provide effective regulation. As said above, the Commission alone is responsible for making a determination in this regard.
To the extent there are common intermarket surveillance costs, those should be allocated based on the agreement of the markets involved. When it comes to matters involving multiple markets, we believe it is important to consider that the regulatory costs of a market not be borne by other markets or their members. CSE believes that the assessment of regulatory-related fees, either on other markets or activity occurring in other markets, should be tied to the specific responsibilities of the individual SRO. The notion that an SRO could assess a fee on activities occurring outside its normal jurisdiction based on activity in other SROs' markets is controversial. In such circumstances, we believe that an adequate justification must be made and approved by the markets affected prior to the imposition of any extra-jurisdictional fee. The regulatory activity must be defined and there must be agreement that the activity is within that SRO's jurisdiction. There must also be a nexus between the regulatory activity and the costs or fee to be imposed. With regard to the TAF, we remain unconvinced an adequate justification or nexus was established.64
Q4. Should the NASD be required, as suggested by the CSE, to alter its systems to include more data from inter-market trading to improve inter-market surveillance? If so, who should pay for this enhancement?
CSE appreciates the opportunity to respond to this comment by Nasdaq and to clarify the record. Nasdaq has mistakenly taken CSE's suggestion that there are ways for Nasdaq/NASD to link their internal audit trails as an invitation for NASD to assume responsibility for the surveillance of trading in Nasdaq securities on other exchanges.65
By way of background, besides their internal audit trails and the ISG databases, the markets also have available the data publicly disseminated by the Nasdaq UTP SIP. This data contains the quotation and transaction information of each market that trades Nasdaq securities. Given its public nature, the information made available by the SIP is not as exhaustive as that available internally to the SROs. For example, when a trade is reported on the consolidated transaction data feed (the "UTDF"), the SIP generally only disseminates basic information such as the security, trade size and price, and the identifier of the market where the transaction was executed. The SIP does not receive or disseminate information on the individual market participants involved in the transaction or order characteristics such as long or short. Instead, the individual market where the transaction took place would generally retain this and additional information within its own trading, clearing, and internal audit trail systems.
When virtually all transactions were effected through Nasdaq, Nasdaq/NASD was able to obtain the specific execution information on most every trade report through its ACT system. However, for the increasing volume that is being executed elsewhere that volume is subject to the away market's requirements and not Nasdaq's ACT requirements. Nasdaq/NASD only captures the identity of the executing market through UTDF. As a result, Nasdaq complained that because it no longer has access to this information, it has become more difficult to conduct cross-market surveillance and to link order events reported through OATS with trade reports contained in ACT.66
As a basic premise, CSE believes that when a transaction occurs on our market, that transaction is under CSE's execution and priority rules. This is so even if the member that is a party to the transaction is a common CSE/NASD member. We operate our surveillance system under the assumption that CSE is obligated to oversee quoting and trading in our marketplace. This would include surveillance for violative behavior such as short sales, wash sales, fraud, insider trading, marking the close, best execution, firm quote compliance, limit order protection and the like. In order to adequately conduct this surveillance, CSE captures through our FOS the entire history of customer and proprietary orders from arrival in the members' order handling systems through display on CSE or another market, execution, cancellation or routing to (and execution on) another market. We believe this information about our members' order and trading activity across all markets enhances our ability to detect abusive across-market activity in which trading on CSE may have played a part. For example, if a CSE member were to execute a proprietary order in another market while displaying a customer order on CSE, CSE's FOS will hold the data showing this violation of customer priority. By having this information available in FOS, we avoid the problem that Nasdaq/NASD is now experiencing in being unable to automatically link order events reported through its OATS with Nasdaq-only trade reports submitted through ACT and consolidated trade reports disseminated by the markets through UTDF.
To be clear, NASD is not responsible for the execution and trade reporting process in other markets. This is the responsibility of the executing market. However, if NASD believes the information from other markets is relevant to its surveillance of Nasdaq market activity (as its complaints about having limited access to information from other markets seemed to suggest), it may wish to consider incorporating some of the functionality CSE has already implemented in its FOS. As NASD already requires its members to submit all their order information, CSE suggested that it would be a relatively simple programming task for NASD to update its OATS and ACT audit trails by linking its order data with trade data similar to CSE's FOS. This might reduce NASD's apparent inability to provide automated surveillance for trading in the Nasdaq market due to the increased in intermarket trading.
As referenced above, Nasdaq has taken our suggestions for improvements to its and NASD's systems as a call for NASD to take on responsibility for the regulation of intermarket trading. This is absolutely not the case. We were simply suggesting a means whereby NASD might enhance its internal audit trail by linking certain information in order to take into account that there is now intermarket trading. As this is functionality CSE currently has available, we are certainly not suggesting that NASD would be expanding its responsibilities if it should determine to incorporate the same functionality. NASD cannot on the one hand complain about a problem of having limited access to information and, on the other, fault CSE for suggesting ways to rectify that deficiency.
Q5. Who would determine what are legitimate regulatory costs? On what basis should such a determination be made?
As they are the ones that bear the costs, the markets should determine what are legitimate regulatory costs. CSE believes that legitimate regulatory costs are the surveillance systems, order audit trial databases, examination programs, and any other program necessary to maintain sufficient regulatory oversight. To the extend those costs relate to the performance of common intermarket regulatory responsibilities, the markets may consider whether each should continue to perform those responsibilities or whether it might be more effective to allocate the responsibilities, and related costs, among themselves.
C. Prohibition of Trading in Nasdaq-listed securities
Nasdaq asks the Commission to identify the markets that trade Nasdaq-listed securities without approved rules and adequate order audit trails, surveillance, and examination programs and prohibit their launch or continuation of Nasdaq trading. Though the adequacy of the programs is a matter between the market and OCIE, Nasdaq speculates about their sufficiency. As discussed above, Nasdaq is in essence questioning whether the Commission is effectively conducting oversight of the markets.
We agree that entry into a new type of trading should require the establishment of approved rules and an acceptable regulatory program and that the Commission should review carefully a market's surveillance procedures before it begins trading. However, we question Nasdaq's proposal to halt trading on markets that may be found to have regulatory issues. Was trading on Nasdaq halted when the Commission issued the Section 21(a) Report? CSE cautions Nasdaq to be careful what it wishes for.
For markets that already trade national market system stocks, the initiation of unlisted trading privilege-based trading of Nasdaq securities would not necessarily have a radical effect on a market's existing structure or regulatory programs. Markets are already accustomed to trading exchange-listed securities along side Nasdaq's decentralized trading of the same securities. Contrary to what Nasdaq seems to confusingly imply, markets do not need to alter their trading models to trade a Nasdaq security. Markets can still chose to employ a specialist model even though the Nasdaq market utilizes a competing market maker model. Moreover, Nasdaq is not alone in employing a competing market maker model. CSE has done so for over a decade. That a broker-dealer, be it market maker or ECN, should determine to become a member of CSE and trade Nasdaq securities on our market does not significantly impact the exchange's method of surveillance, examination, investigation and enforcement.
With respect to regulation, SROs should most certainly be able to leverage off their existing infrastructures to regulate Nasdaq trading. For the most part, CSE's existing rules apply equally to Nasdaq securities although a subset of amendments were made to accommodate Nasdaq trading. This subset is substantially the same as our existing rules for other securities. Aside from our rules, CSE has also enhanced our existing audit trail, surveillance and examination programs to accommodate the trading.
In recognition of the importance of our SRO role, CSE has acted proactively in undertaking several regulatory initiatives to accommodate the Exchange's trading of Nasdaq securities. The Exchange has revised its rules, consulted with OCIE, had an independent evaluation performed of its surveillance program, increased regulatory staff, and invested in software enhancements and upgraded regulatory hardware. We believe the Exchange has demonstrated to OCIE its ability to regulate trading on the CSE market, be it in NYSE, Amex or Nasdaq securities. As has been expressed before, should OCIE have any concerns we will work diligently to address them.
CSE's and other market's decision to begin trading Nasdaq securities has come at no small amount of public criticism from Nasdaq. Seemingly unable or unwilling to compete with the lower cost models, Nasdaq has argued that CSE's and others regulatory programs must somehow be inadequate. We strongly disagree with this premise and, moreover, do not believe it is a matter for Nasdaq/NASD to judge in the first part, let alone when they have no knowledge of our internal program. What is the natural and normal intermarket competition experienced in the national market systems for NYSE, Amex and options, is being parlayed into a regulatory crisis in Nasdaq securities at the expense of CSE and other markets.
D. Exchange-Listed Securities and Exchange-Listed Options
There is no reasonable justification for isolating Nasdaq-listed securities for disparate surveillance treatment under the national market system. While Nasdaq itself has acknowledged there is nothing unique about Nasdaq securities. That the securities were only traded in one market before does not make them unique in the current environment. That one market was able to oversee its markets is not a litmus test of its ability to singly oversee trading over multiple markets. Moreover, this fails to recognize that Nasdaq securities and options on those products have been the subject of intermarket surveillance since ISG was formed.
Nasdaq ignores that the same cross-market manipulation issues that form the predicate for the regulatory solution it advocates in the Nasdaq world apply equally to the NYSE-listed stocks in which Nasdaq trades over 10% of the volume. By not arguing that the same surveillance programs are inadequate as applied toward NYSE-listed securities or that NYSE assume regulatory jurisdiction over Nasdaq members trading NYSE stocks, Nasdaq seems to tip its hand that its motivations may be something other than altruistic.
Q1. Do commenters believe that there is unequal regulation of exchange-listed securities among the markets trading such securities? If so, do commenters believe that the proposals made by Nasdaq with respect to Nasdaq securities would address such unequal regulation in the listed markets? If not, what other approaches do commenters recommend?
It is our belief that the current intermarket surveillance procedures, and oversight thereof, are applied consistently and equally across all markets and across all national market system securities. While Nasdaq has proposed that the structure be altered only as it is applied toward Nasdaq-listed securities, we cannot identify any distinct about the regulation of these particular securities that would warrant this alternate approach. It is CSE's belief that there is no such distinction Beyond ignoring the fact that the same cross-market manipulation issues, if they exist, apply equally to all other securities, Nasdaq single regulator model fails to account for the options and other derivatives productions that overly Nasdaq securities.
Contrary to its position on the regulation of Nasdaq securities, Nasdaq does not appear to take issue with whether the same surveillance programs are inadequate as applied toward other national market system securities. We fail to see how the same programs, when viewed in the context of Nasdaq securities, are considered so inadequate as to rise to the level of a "regulatory crisis."
Q2. Should the Commission require an intermarket consolidated order audit trial system for Nasdaq-listed and exchange-listed securities, other than options?
If a comprehensive internal audit trail is vital to conducting regulation in Nasdaq securities, we believe the same would be true for exchange-listed securities. CSE's FOS already contains this information. Our FOS also contains information on the lifecycle of all orders entered by members, wherever ultimately executed. We believe that markets should be able to maintain their own audit trials with the specific content conducive to their internal surveillance systems. However, as we stated earlier, some standardization of basic format might be useful to the industry for purposes of cost effectiveness. If these internal systems are in place, there is no need for the Commission to mandate an intermarket consolidated order audit trail.
* * * * *
CSE believes that the record established over the last year indicates that the real issue for Nasdaq is money. We believe Nasdaq's motivation in submitting its Petition is to effect a bailout of its contract for regulation with NASD, a contract that failed to anticipate real competition in the trading of Nasdaq securities. However, increased competition -- and resulting decreased revenues -- does not justify altering the existing self-regulatory and intermarket surveillance model, nor does it justify shifting Nasdaq/NASD's operating costs to other markets. To conceal its true motive, Nasdaq claims that it and NASD oversee and subsidize other markets, which it believes have inferior surveillance programs. These claims are simply wrong. NASD is not a super regulator of Nasdaq securities. Its jurisdiction is limited to the Nasdaq market, just as other regulators' jurisdiction is limited to their respective markets. Nasdaq's chief criticism of our and others' surveillance programs as well as the ISG -- that other order audit trials are not comparable to Nasdaq/NASD's - does not warrant its proposed solution.
While conveniently failing to acknowledge known facts, Nasdaq speculates about the adequacy of other markets' surveillance programs when it has no actual knowledge of those programs. Contrary to Nasdaq's assertion and implication, CSE has developed and administers a comprehensive surveillance program for the Nasdaq trading that occurs in our market. CSE believes we fulfill our role as self-regulator every bit as vigorously and effectively as Nasdaq. The design and adequacy of our and other markets' programs are subject to standard Commission oversight by OCIE, an oversight system that we believe operates effectively. While the Exchange gladly responds to any Commission request, we believe there has to come some point at which the regulatory cloud cast by Nasdaq is lifted and we instead compete based on our business practices.
We would be happy to answer any questions or further discuss our views with the Commission.
Jeffrey T. Brown
cc. Chairman Michael Oxley, House Financial Services Committee
Chairman William H. Donaldson
Commissioner Paul S. Atkins
Commissioner Roel C. Campos
Commissioner Cynthia A. Glassman
Commissioner Harvey J. Goldschmid
Ms. Annette L. Nazareth
Ms. Lori Richards
Mr. Robert L.D. Colby
Mr. John McCarthy
|1|| Securities Exchange Act Release No. 47849, 68 FR 27722 (May 20, 2003) ("Concept Release") and letter dated April 11, 2003 to Jonathan G. Katz, Secretary, Commission from Edward Knight, Executive Vice President, Nasdaq ("Petition").
|2|| The Plan is the Commission approved joint self-regulatory plan among the registered national securities association and registered national securities exchanges with the purpose of providing for the collection, consolidation and dissemination of quotation information and transaction reports in eligible Nasdaq-listed securities. The signatories to the Plan are the American Stock Exchange ("Amex"), Boston Stock Exchange ("BSE"), Chicago Stock Exchange ("CHX"), CSE, National Association of Securities Dealers ("NASD"), Pacific Exchange, Inc. ("PCX/ARCA"), and Philadelphia Stock Exchange ("Phlx")(hereinafter referred to as "Plan Participants").
|3|| Petition, supra note 1, at 1.
|4|| See, e.g., Securities Exchange Act Release No. 47919 (May 23, 2003), 68 FR 32788 (June 2, 2003)(waives Nasdaq's Automated Confirmation Transaction Service ("ACT") fees for firms that exceed certain volume requirements).
|5|| Shakespeare, William. Hamlet, Prince of Denmark. Edited by Robert Hapgood. Cambridge: Cambridge University Press, 1999.
|6|| Petition, supra note 1 at 2.
|7|| Our beliefs are not unfounded. In the cover letter accompanying its white paper on the regulation of Nasdaq securities, Nasdaq acknowledged that its motivations were, at least in part, pecuniary. See letter from Richard Ketchum, President, Nasdaq, to Harvey Pitt, Chairman, et al., Commission (January 24, 2003) ("Nasdaq Cover Letter") and attached Nasdaq Regulation White Paper: A Call for a Fairer Allocation of Responsibilities and Costs in a Fragmented Market (January 24, 2003) ("Nasdaq White Paper").
|8|| Petition at 2.
|9|| Petition, supra note 1 at 14-15.
|10|| See, e.g., letter from William Donaldson, Chairman, Commission, to David Colker, President, CSE (March 11, 2003).
|11|| Letter from Jeffrey T. Brown, Senior Vice President, Secretary and General Counsel, CSE, to the Honorables Harvey Pitt, Paul Atkins, Roel Campos, Cynthia Glassman, and Harvey Goldschmid, Commission (February 19, 2003)("CSE Response"). We hereby incorporate our comments made in the CSE Response.
|12|| Letter from Richard Ketchum, President, Nasdaq, to Jonathan G. Katz, Secretary, Commission (January 9, 2002) ("Ketchum Letter"); letter from Edward S. Knight, Executive Vice President and General Counsel, Nasdaq to Jonathan G. Katz, Secretary, Commission (March 6, 2002); letter from Richard Ketchum, President, Nasdaq, to Richard J. Hillman, Director, Financial Markets and Community Investment, U.S. General Accounting Office (March 27, 2002)("GAO Letter"); Petition, supra note 1; letter from Richard Ketchum, Deputy Vice Chairman and President, Nasdaq, to Annette Nazareth, Director, Division of Market Regulation, Commission (January 28, 2003); Securities Exchange Act Release No. 47022 (December 18, 2002), 67 FR 78840 (December 26, 2002)(SR-NASD-2002-158)(Nasdaq closing price modifier proposal); Securities Exchange Act Release No. 47621 (April 2, 2003), 68 FR 17418 (April 9, 2003) (Nasdaq ACT fee reduction).
|13|| Ketchum Letter at 2.
|15|| GAO Letter at 2.
|16|| Nasdaq's contention is based upon speculation about the adequacy of other markets' surveillance programs. However, surveillance programs and procedures are required to be kept confidential between the Commission and the respective regulator. See In the Matter of the Application of The International Securities Exchange LLC for Registration as a National Securities Exchange; Findings and Opinion of the Commission, Exchange Act Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) ("ISE Exchange Application").
|17|| GAO Letter at 2.
|18|| Nasdaq Cover Letter, supra note 7 at 3.
|19|| See Nasdaq White Paper, supra note 7 at 6.
|20|| See Page 4-40, 4.3.6 of OATS Reporting Technical Specification data October 29, 2001.
|21|| See Nadsaq White Paper, supra note 7 at 5.
|22|| See Page 4-1, 4.1.1 of OATS Reporting Technical Specification dated October 29, 2001.
|23|| In 1998 when OATS was being developed, CSE assisted NASD to ensure that it was capturing the right information. On August 24, 1998, NASD representatives visited CSE to discuss CSE's development and implementation of the FOS system. Knowing that Nasdaq, NASD and NASD Regulation Inc. ("NASDR") were under Commission order to improve their regulatory program following the 21(A) Report, CSE, in the spirit of cooperation, provided a detailed description to NASDR for them to follow in implementing OATS.
|24|| Letter from Richard G. Ketchum, President, Nasdaq, to Jonathan G. Katz, Secretary, Commission (January 9, 2002).
|25|| Letter from Jeffrey T. Brown, Senior Vice President, Secretary and General Counsel, CSE, to Jonathan G. Katz, Secretary, Commission (January 24, 2002).
|26|| For example, CSE firmly believes that filing the ISG Agreement under Section 11Aa3-2 of the Act as a national market system plan or under Rule 17d-2 of the Act, both alternatives that have been discussed within ISG, would be an important step toward creating a new framework for intermarket regulation.
|27|| Nasdaq Cover Letter, supra note 7 at 2.
|28|| Petition, supra note 1 at 3.
|29|| Id. at 4.
|30|| Act Sections 6(b)(5) and 15A(b)(6).
|31|| Act Sections 6(b)(6) and 15A(b)(7).
|32|| Act Sections 6(b)(1) and 15A(b)(2).
|33|| Nasdaq appears to agree on this point. Petition, supra note 1 at 10 n. 15 ("Moreover, only the Commission has the ability to evaluate the exchanges surveillance and enforcement systems").
|34|| See Nasdaq White Paper, supra note 7 at 5.
|35|| Securities Exchange Act Release No. 42037 (October 20, 1999).
|36|| Under this provision, each market that trades NYSE- or Amex-listed securities, utilizes a minus and zero-minus "tick test" to determine whether its members are in compliance with the short sale rule. Per this tick test, a short sale cannot be effected below the last regular way sale (a minus tick) or at the last price if the price is below the next proceeding different price of a regular way sale (a zero minus tick). See Exchange Act Rule 10a-1(a)(1) and (2). The rule also provides that a market can elect to apply the tick test based on either the last sales reported on its particular market (the "intramarket tick test") or the last sales reported to the national market system consolidated tape (the "intermarket tick test"). Id. CSE utilizes the consolidated or intermarket tick test for exchange-listed securities.
|37|| CSE Rule 12.1 prohibits, in part, "sales of any security at successively lower prices, for the purpose of creating or inducing a false, misleading or artificial appearance of activity in such security on the Exchange or for the purpose of unduly or improperly influencing the market price for such security or for the purpose of establishing a price which does not reflect the true state of the market in such security." Apart from the initial requirements to identify a short sale order when entered, CSE members are also required to submit long/short information as part of their FOS file, which feeds into CSE's surveillance systems. See Interpretation and Policy .02 of CSE Rule 4.2. In addition, members are required to receive reasonable assurance from their customers that the security will be delivered by settlement. CSE Rule 3.8.
|38|| Petition, supra note 1 at 9.
|39|| See, e.g., Act Sections 6(b)(8), 11A(1)(c)(ii) and 15A(b)(9). Recognition of the need to eliminate artificial regulatory advantage does not mean, however, that markets should be forced into a "single mold." Markets should be free to adopt any business model that is consistent with the Act requirements. Additionally, markets should not be allowed to adopt rules that would unnecessarily burden or restrict trading in other markets. See, e.g., letter dated May 23, 2003 from Jeffrey T. Brown, Senior Vice President and General Counsel, CSE to Jonathan G. Katz, Secretary, Commission (commenting on Securities Exchange Act Release No. 47621 (April 2, 2003), 68 FR 17418 (April 9, 2003)(SR-NASD-2003-56)("NYSE Rule 390-like" Nasdaq proposal to waive ACT fees, but only for members that "(i) execute[ ] an average daily volume of 10,000 or more transactions through SuperMontage or any other transaction execution system using SuperMontage's functionality to report transactions; (ii) report[ ] to ACT at least 98% of the internalized transactions in Nasdaq National Market and SmallCap Market securities executed by the participant during the month; and (iii) post[ ] in SuperMontage at least 70% of the bids, offers, and non-marketable limit orders in Nasdaq National Market and SmallCap Market securities communicated by the participant to any market center").)
|40|| In fact, in adopting Regulation ATS in 1988, the Commission found that Nasdaq is the functional equivalent of an exchange. Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998).
|41|| Designation as a national market system security is based on characteristics such as volume, price and outstanding shares. Whether a security is listed by an exchange or Nasdaq is irrelevant to the determination. Exchange Act Release No. 14416 (January 26, 1978), 43 FR 4354, 4355 (February 1, 1978).
|42|| Securities Exchange Act Release No. 45405 (February 6, 2002), 67 FR 6556 (February 12, 2002).
|43|| NASD, SECURITIES REGULATION IN THE UNITED STATES (December 1992)
|44|| See ISG Agreement, July 14, 1983; see also ISG Investigative Procedures, 2002.
|45|| Through this multi-layered review, it is often the case that one market detects trading patterns that others do not, resulting in coordinated investigations with or referrals to both sister-regulators and/or the Commission's Division of Enforcement.
|46|| Securities Exchange Act Release No. 45956, 67 FR 36740, 36750 (May 24, 2002).
|47|| Id.; see also Section 6(h)(3)(I) and (5)(A), and Section 15A(m).
|48|| Securities Exchange Act Release No. 45956, 67 FR at 36750. While stating that full membership in ISG was essential, the Commissions did not require it. An exchanges or association could instead elect to (i) become an Affiliate Members of ISG if it also enters into supplemental agreements to share the same information as Full Members of ISG currently share with each other or (ii) enter into bi-lateral agreements with each of the markets so that it is able to share the same information as Full Members of ISG currently share with each other. Id at 36750-36751.
|49|| Id.(emphasis added).
|50|| See ISE Exchange Application, supra note 16.
|51|| Nasdaq has itself acknowledged ISG's important role. See January 22, 2001 letter from Richard G. Ketchum, Nasdaq, to Jonathan G. Katz, Secretary, Commission (commenting on PCX/ARCA filing SR-PCX-00-25). In the letter Nasdaq stated that, before PCX/ARCA should be permitted to establish its new market, "(an) unresolved intermarket issue concerns the need to promote the integrity of market data across markets. The Intermarket Surveillance Group, which coordinates the exchange of market data among SROs, was intended to address these issues and, we contend, should be tasked with the responsibility of analyzing data integrity issues likely to arise from the PCX/ARCA affiliation." Id. at 8.
|52|| Letter from Brian Colby, Chairman, ISG, to Jonathan G. Katz, Secretary, Commission (June 18, 2003).
|53|| Id. at 4.
|54|| The SEC identified these same components as essential to the regulation of single stock futures when she testified before Congress in June 2000. See Testimony of Annette L. Nazareth, Director, Division of Market Regulation, Commission, concerning H.R. 4541, The Commodity Futures Modernization Act of 2000, before the Subcommittee on Risk Management, Research and Specialty Crops Committee on Agriculture, United States House of Representatives (June 4, 2000).
|55|| NASD also owns the Amex, which is an exchange that competes with CSE and other markets.
|56|| Securities Industry Association, Recommendations Regarding Self Regulatory Structure (May 23, 2000),
|57|| In constructing the Nasdaq UTP Plan, the Plan Participants specifically determined to retain the responsibility for monitoring trading in their own markets in lieu of Nasdaq performing that service on their behalf through its Market Watch service.
|58|| Petition, supra note 1 at 12.
|59|| Id. at 13.
|60|| Nasdaq's White Paper was also discussed at an ISG meeting on February 20, 2003. At that meeting, NASD indicated that Nasdaq was the one that had proposed the alternative approach and NASD chose not to speak to it.
|61|| There is precedent for participants objecting to scope expansions of particular national market system plans. For example, Amex had previously proposed that the Nasdaq UTP Plan be expanded to include an intermarket linkage, similar to the Intermarket Trading System. Nasdaq object to this on the basis that it is beyond the scope of the Plan. In the CTA context, the Amex had proposed a change relating to regulation of alternative trading systems. Nadsaq again objected, saying the proposal touched on larger market structure issues and should be thought out in a larger context.
|62|| Petition, supra note 1 at 13.
|63|| The TAF was recently permanently approved over the unanimous protest of commenters. Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003).
|64|| See letter from Jeffrey T. Brown, Senior Vice President, Secretary and General Counsel, CSE, to Jonathan G. Katz, Secretary, Commission (December 20, 2002)(CSE comment letter to NASD's TAF proposal, SR-NASD-2002-148).
|65|| Petition, supra note 1 at 13.
|66|| Nasdaq White Paper, supra note 7 at 5.