January 10, 2005
January 10, 2005
The Honorable William H. Donaldson
Securities and Exchange Commission
450 5th St., NW
Washington, DC 20549
Dear Chairman Donaldson:
I wish to applaud you and the SEC for ongoing initiatives to strengthen the U.S. securities markets, markets that are already the envy of the world. Intense competition at home and abroad is already driving our largest equities market, The New York Stock Exchange, to become a hybrid market, where customers will soon be able to trade electronically or by auction. However, the virtual Consolidated Limited Order Book, or CLOB, suggested as part of the proposed Regulation NMS, has potential to undermine this important innovation.
The CLOB would create splintered electronic-only markets that would be incapable of crossing large trades, driving institutional investors to alternative, possibly foreign, markets. Large orders would no longer be intermingled with small ones, trades would no longer be fair and equal, and small investors would suffer. The CLOB would eliminate inter-market competition, stifling further innovation. The U.S. Congress and the SEC were correct in rejecting the CLOB as recently as the year 2000.
A better option would be to protect the best bid and offer price in each market. This would ensure competition and innovation continues, to the benefit of all market participants.
Regulation is essential to well-functioning markets. However, its judicious use can complement existing market forces, such as competition, in fostering innovation, to protect and benefit market participants. The New York Stock Exchange hybrid market represents an important competition-driven innovation that should be encouraged, not destroyed, by the SEC.
Once again, I thank you and the SEC for ongoing efforts to strengthen U.S. securities markets.
Craig G. Rennie, Ph.D.
Assistant Professor of Finance
Sam M. Walton College of Business
1 University of Arkansas
Fayetteville, AR 72701-1201