Software & Information Industry Association
July 14, 2003
Mr. Jonathan G. Katz
RE: Request for Comment on Nasdaq Petition Relating to the Regulation of Nasdaq-Listed Securities [Release No. 34-47849; File No. S7-11-03]
Dear Mr. Katz,
The Financial Information Services Division (FISD) of the Software & Information Industry Association (SIIA) requests consideration of the following comments concerning the regulation of Nasdaq-Listed securities. We would like to offer our apologies for submitting this comment letter after the deadline for submission.
The FISD is a neutral business forum for exchanges, market centers, data vendors, investment managers, broker/dealers and others associated with the worldwide flow of financial information. Because the scope of Nasdaq's petition is beyond FISD's specific mandate, we do not have complete consensus among our members on the totality of issues identified or recommendations contained in the concept release. This letter represents a consensus among the market data vendor members of our Executive Committee and the views of a significant portion of the market data users on the Executive Committee.
One area where there does appear to be a high level of industry concern relates to the establishment of uniform trading rules across all markets - and more precisely the issue of sub-penny quoting and trading. A significant number of FISD members, particularly among our market data vendor members, are very concerned about the increase in sub-penny quoting and trading and its impact on market data traffic and capacity. We take no specific position on the market quality impact of sub-penny quoting and trading. But, we respectfully ask that the Commission consider how the additional capacity requirements of sub-penny market activity - with their attendant financial burden on vendors, market participants, and ultimately investors - weigh against what seem to be, at best, marginal market quality advantages from sub-penny market activity.
The potential impact of an increase in sub-penny quoting and trading on market data traffic is substantial. Our general observation is that, since the advent of decimal trading, the number of quotes and trades generated has increased in excess of the growth in the number of shares traded. We fear that sub-penny quoting and trading could increase market data traffic more than the migration to decimals. The conversion from fractions to decimals resulted in a six-fold increase in the number of possible quotation levels per dollar. Continued movement to sub-pennies could potentially result in a ten or even hundred-fold increase. As an increasing amount of equities trading occurs in sub-pennies, some fear that options might be forced to move to penny increments. This would have even more serious message traffic implications.
The traffic impact of sub-penny quotations would be exacerbated if the Securities Information Processors (SIPs) for the U.S. equities markets began to carry quotation information in sub-pennies. Market data vendors are required under the SEC vendor display and quote rules to carry prices supplied by the various SIPs. Today, the SIPs carry quotation data in pennies. SIP quotation information is the primary source of consolidated market data for investors who access the data through online brokerage firms and public web sites. Consolidated information that includes sub-penny quotations is typically only available to professional traders through sophisticated order routing systems. To eliminate these "hidden markets" (in itself a laudable goal), the SIPs might move to sub-penny quotations, increasing the capacity and traffic burden on the industry.
We encourage the Commission to consider whether the impact of sub-penny quoting and trading on rising infrastructure costs is adequately offset by market quality benefits to investors and market participants. (Sub-penny quotations also increase the challenges of managing screen displays associated with rapidly changing quote montages.) Are additional network and system costs merited in order for investors and traders to realize gains that typically would be measured in pennies per trade? We understand that a disproportionate share of sub-penny quotes occur at the margins (.001/.009 or .0001/.0009) suggesting that these prices occur so that participants can jump ahead of others in trade execution - not because there is a different view about the true value of the security.
FISD urges the Commission to take a closer look at the impact of sub-penny quoting and trading and specifically its potential impact on increasing market data message rates. The continual proliferation of marginally useful market data traffic is a real issue and will necessitate significant investment as well as additional traffic mitigation strategies by all industry participants. FISD believes that a minimum price increment is needed and encourages the Commission to evaluate the potential impact of smaller and smaller sub-penny increments on reducing transaction size and increasing trade execution costs.
Thank you for your consideration. We stand ready to assist the Commission in further evaluating the impact of sub-penny increments on the market data community. Please don't hesitate to contact me if we could be of additional service.