April 18, 2000
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Attn: Jonathan Katz, Secretary
Re: Securities Exchange Act Release No. 42208, File No. S7-28-99,
Regulation of Market Information Fees and Revenues Concept Release
Ladies and Gentlemen:
Knight/Trimark Group, Inc. ("Knight") welcomes this opportunity to comment on the Commission's concept release on the regulation of market information fees and revenues. Knight, headquartered in Jersey City, NJ, is the parent company of Knight Securities, Inc., Knight Capital Markets, Inc. (formerly Trimark), and Knight Financial Products (formerly Arbitrade, LLC). Knight subsidiaries make markets in equity securities listed on Nasdaq, the OTCBB of the National Association of Securities Dealers, Inc., the New York Stock Exchange and American Stock Exchange, and in options on individual equities, equity indices, fixed income instruments and certain commodities in the U.S. and Europe. The firm also maintains an asset management business for institutional investors and high net worth individuals through Knight Financial Products' Deephaven subsidiary.
As the number one destination for online trade executions, Knight is the processing power behind the explosive growth in securities trading via the Internet. The firm was recently selected to Fortune's "e-50 Stock Index," an elite collection of companies that are shaping the new Internet-based economy. Currently, the four-year-old company employs more than 900 people worldwide with offices in Jersey City, NJ; Jericho, White Plains, Purchase and New York, NY; Chicago, IL; Boston, MA; Minnetonka, MN; Santa Clara, CA; and London, England.
As a general matter, Knight believes that providing real time market information to all market participants as cheaply as possible is fundamentally important to the continued success of the U.S. securities markets. We believe that potential Commission rulemaking should accomplish at least three objectives. First, as we discuss below, the Commission should rectify existing competitive inequities in which certain market participants receive market information revenues that are used for competitive purposes. Second, the Commission should provide a framework that provides market information to retail investors as cheaply as possible to improve transparency and increase competition. Third, the Commission should ensure that market information revenues are not utilized by SROs to compete with those market participants that do not receive the revenues.
The Commission has asked for comment on a variety of issues. We respectfully submit comments on the following issues for your consideration.
SRO Rebates to Members
We believe that the Commission must be extremely sensitive to maintaining fair competition among market participants. The Commission has approved rebate or transaction credit programs that, by their very nature, place some market participants at a competitive advantage. Some SROs allow their members to benefit from the revenues generated by their transactions while most SROs do not pass on the revenues to their members.1 The Commission asks in the concept release whether rebate programs are consistent with the Exchange Act objective of fair competition. The answer is no. Market participants that receive rebates or transaction credits from their SRO are at a competitive advantage to market participants that receive no credits or rebates. It is no coincidence that those market participants that receive credits or rebates from their SROs are able to offer some of the highest payments for order flow in the industry. Allowing only certain market participants to utilize market data revenue to attract order flow is clearly inconsistent with the Exchange Act objective of fair competition.
Even if rules are changed, as the Commission proposes as an alternative, to reward those SROs that provide the highest quality market information, rebate programs will continue to be antithetical to fair competition. Rebate programs also highlight conflicts that are inherent in a self-regulatory environment. The Commission asks whether rebate programs indicate that market information revenues exceed self-regulatory funding requirements? There are only two possible answers to this question. Either the SRO that has implemented a rebate program is compromising its regulatory program to further the commercial interests of its members, or, the SRO with a rebate program has adequately funded its regulatory program and excess market data revenues can be utilized for competitive purposes. We believe that the existence of programs that award rebates of market information revenues to SRO members most likely suggests that some SROs may not be allocating sufficient resources to their regulatory programs.
Improved Transparency and Increased Investor Protection and Competition
Reform to the market information fee structure should provide retail investors with low-cost access to the same information available to professional market participants. In our opinion, reducing the costs paid by retail investors for market information will improve market transparency and further increase investor protection as a better informed investor is less likely to be defrauded. Better-informed investors, armed with high quality, real-time market information, will also improve market liquidity and increase competition between market centers.
Knight is a strong proponent of promoting fair competition between market centers. The Commission, by reforming the market information fee structure, will further enable individual investors to ensure that their orders receive the best possible executions. By further empowering the individual investor, the benefits of competition between market centers will significantly increase. Reducing the costs paid by retail investors for market information will increase the ability of individual investors to evaluate and possibly choose among the competitive products being offered by market centers such as automated price improvement, enhanced liquidity, and guaranteed immediate executions greater than the quoted size.
Distribution of Revenues and SRO Funding
The Commission, in the concept release, asks whether market information revenues should be used for costs that directly enhance the integrity and reliability of the market information-such as market surveillance costs. Knight believes that effective market regulation is integral and fundamental to the operation of a fair and efficient marketplace. We believe that the utilization of market information revenues to improve and enhance market surveillance for violations of SRO trading rules or violations of the federal securities laws is acceptable. We would urge the Commission, however, to ensure that market information revenues are not used, directly or indirectly, for competitive purposes. As SROs prepare to demutualize and increasingly become direct competitors of market participants who do not receive market information revenues, the Commission must fashion rules in such a way as to ensure that the competitive balance is not tipped in favor of those market participants that receive market information revenues. We believe that the cost of market regulation could be reasonably identified in an objective manner but potential rules must limit the ability of SROs to increase market regulation costs unreasonably.
I hope that the Commission and Commission staff find these comments helpful. If Knight or I can be of further assistance to you on this matter, please do not hesitate to ask.
Michael T. Dorsey
Senior Vice President and
1 See Securities Exchange Act Release Nos. 41238 (March 31, 1999), 40591 (October 22, 1998) and 38237 (February 4, 1997) in which the Cincinnati Stock Exchange, Boston Stock Exchange and Chicago Stock Exchange established revenue sharing or transaction credit programs. See also Exchange Act Release No. 41174 (March 16, 1999) in which the NASD implemented pilot program to provide credit for Third Market transactions.