ProActive Capital Management
220 Montgomery Street
San Francisco, CA 94104
September 1, 1998
Jonathon G. Katz
Securities and Exchange Commission
450 Fifth St. N.W.
Washington, D.C. 20549
Re: File No. 4-208
Dear Mr. Katz:
We would like to comment on the pending integration of the PCX Application (which we refer to as the "OptiMark Trading System" or "OptiMark") with the Intermarket Trading System (ITS).
The National Market System (NMS) objectives mandated by Congress in 1975 intended U.S. equities markets to be "linked together electronically so they may compete so as to make for broader, deeper, and more liquid capital markets." The intent was to benefit the public interest, to provide for the protection of investors, to allow for economically efficient execution of securities transactions and to facilitate the maintenance of fair and orderly markets by ensuring fair competition among exchange markets.
Despite the 1975 congressional mandate for a NMS the U.S. still has a highly fragmented market system that is being eclipsed by more technologically advanced systems in foreign markets. In order to remain competitive, it is essential that we fully realize the 1975 Congressional mandates. Implementing the OptiMark Trading System without delay, encumbrances, or volume restrictions would be a significant step toward that important goal.
Twenty-three years is too long to wait to ensure "best execution." U.S. investors now have many order entry choices, but access to those exchanges and trading systems is often limited, sometimes complex, and therefore a source of friction and disadvantage in U.S. equities markets. Impediments to "best execution" and to a fully functional and robust ITS do not serve America, American companies, or investors.
Best execution should be readily available. If an institution, private individual, broker dealer, or market maker is able to receive better or "best execution" via OptiMark, they will be more inclined to participate again and more inclined to participate sooner than otherwise in U.S. equities markets. Depth of markets will increase and bid/ask spreads will narrow as friction points are removed. As such, OptiMark is beneficial to the structure, health, and vitality of the American financial system.
Optimark should not be delayed or unreasonably encumbered in any way whatsoever. OptiMark, as a facility of the PCX, combines the elements of a traditional auction market with advanced technology that allows users to better express their trading interests. Therefore, OptiMark should have open and unrestricted access to the ITS without any volume restrictions whatsoever. Formula restrictions on OptiMark-generated volume would be an artificial handicap on the U.S. equities markets that would not benefit any investor. Formula restrictions would benefit only vested interests and less competitive entities, making it more difficult to provide for "best execution." Formula restrictions would be contrary to NMS objectives. Formula restrictions would be detrimental to investors and the health of U.S. capital markets.
We urge the adoption of the OptiMark System without any ITS restrictions to facilitate equal and fair investor access to the best bids and offers across all exchanges. If investors enter large volumes of trades via OptiMark, they will do so because they perceive greater value and benefit. Let investors benefit from and have access to all of the choices and liquidity in the market place, without artificial constraints, unreasonable delays, or opportunities for abuse.
The OptiMark system should be allowed to operate as designed, as a high-speed mechanism free of clerical intervention and errors. If, as has been documented, "front running" of and "piggy backing" on customer orders occurs, why should an unnecessary manual step and opportunity for graft be added? If "backing away" from trades and "late trades" occur, why should they be allowed or tolerated? We should seek to ensure open, fair, orderly, and competitive markets. Investors and U.S. markets will benefit by the completion of a true NMS which will provide for more rigorous and uniform requirements and audit trails.
U.S. markets should utilize technology to become more efficient and effective. Integration of technology into existing markets can add liquidity, depth, and fluidity to markets. If on the other hand, artificially wide spreads and fragmented markets are allowed, there will not be sufficient economic impetus to innovate.
For all the above reasons, we feel compelled to speak out on behalf of the OptiMark Trading System. We urge the SEC to amend the ITS only to define and describe the PCX Application, and not to implement rules that would include any kind of formula or secondary manual probe of the market.
Further, given what has transpired with the ITS Operating Committee in this instance, and the SECs additional proposal for rulemaking regarding the NASD CAES system, we urge a review of procedures requisite for the "Intermarket Trading System Operating Committee" (ITSOC) to reach an agreement. We suggest that a majority vote or 2/3 vote be used instead of the currently requisite unanimous vote.
To leave the rulemaking process as is allows one participant to block any innovation or proposal that might hurt its own interests, even if it were clearly in the best interests of the national markets. It seems evident from what has transpired with the OptiMark Trading System and with the NASD CAES system, that a very few exchanges, when threatened by competition, can block action at the ITS Operating Committee level and likely even prevent actions from being raised initially. With a unanimous voting system in place, it is only natural that controversial issues will rarely be raised, let alone resolved.
Finally, we also suggest that all markets participants posting markets be required to provide access to and from and complete interaction with the ITS. In other words, all limit order books viewable to a specific group of market participants in ITS should be equally available for trading by all participants. A consolidated limit order book is necessary to avoid fragmentation and achieve a true NMS.
We urge the SEC to do everything within its power to fully and speedily realize the NMS objectives Congress mandated in 1975.
Chief Investment Officer
ProActive Capital Management
cc: Dr. Richard R. Lindsey
Director, Division of Market Regulation