March 22, 2004
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20459-0609
Re: Securities and Exchange Commission Release No. 34-49408; File No. S7-10-04;
Dear Mr. Katz:
Global Electronic Trading Company ("GETCO") appreciates the opportunity to comment on the proposed Regulation NMS.
First, GETCO is a liquidity provider / market maker on major electronic communications networks ("ECNs") including Island, Instinet, and Archipelago. GETCO uses automated electronic systems to proprietarily trade in excess of one billion shares of stock per month. While not designated a market maker in any exchange traded product, our primary business is providing liquidity as a market maker in electronic exchange markets. More than half of GETCO's trading is liquidity adding. GETCO has significant expertise in trading equity markets and has made markets tighter on electronic trading platforms and thereby made them more efficient for all participants. As the SEC has noted in its filing, reduced spreads have resulted in significant cumulative investor savings.
GETCO opposes the first three regulatory initiatives being proposed. First, GETCO is not aligned with expanding the trade-through rule to the ECNs, much less continuing to maintain the trade-through rule at the NYSE. Second, regarding the de minimis fee, GETCO takes the stand that the market should determine such fees. And lastly, sub-penny quoting allows for tighter spreads, increased price discovery and promotes efficient pricing in the equity markets.
The intention of the proposed regulation is to "enhance and modernize" the regulatory structure for U.S. equity markets. We believe policies promoting free markets lead to the best possible outcome for enhancements and modernization for any structure.
The NMS has been very successful in promoting growth, efficiency, innovation, and competition. Competition among the ECNs has been the engine providing much of that growth and efficiency over the years. The best in terms of greatest liquidity, lowest trading fees and fastest technology ECNs attract the majority of the volume traded among ECNs. Competition has fostered advances in trading technology and pricing, allowing the investors to win in the end.
In the markets where there is no trade-through rule, competition has brought a great deal of benefits for all of us. There are many more market centers aggressively working to enhance and modernize their offerings to gain or keep market share. The lack of the trade-through rule has given the opportunity for Archipelago Exchange, Inet ATS, Inc. ("Inet") and others to each come up with their own market center philosophy that drives customers their way. They are ongoingly increasing efficiencies and technology as they are in direct competition with each other.
The lesson among ECNs is to post the best markets possible to get order flow. Investors send their orders to the most efficient market orders. Large sophisticated retail brokers such as Schwab, Ameritrade, E*Trade, to name a few know what they are doing. They know how to route orders to the most efficient places for execution.
This level of competition does not exist at the New York Stock Exchange ("NYSE"). At the NYSE, still 75% of trading remains in that market. How is this scenario beneficial to the institutional or individual investor? Isn't more competition what is best for investors? The trade-through rule does not promote competition. Repealing the trade through rule at the NYSE will allow the same level of competition to be available for all investors.
It is interesting to note that through the collapse of the internet bubble and the subsequent bear market, relatively few complaints were issued on the Nasdaq and ECNs regarding how they conduct their exchanges. This is surprising, given the Internet stocks were predominately traded on the Nasdaq and ECNs. However, recent complaints from individuals and institutions have centered on how the NYSE conducts its business. What is the logic of applying NYSE rules, such as trade-through, to the Nasdaq and ECNs given that participants are satisfied with the way business is being conducted at those market centers? Abandoning the trade-through rule would level the playing the field for all market participants. It would eliminate the NYSE's inefficient monopolistic practice, benefiting all market participants.
Current price structures at the ECNs are market driven and the structures are set up such to incentivize GETCO to post large bids and offers on a continuous basis across a large number of securities. In fact, in the highly liquid securities GETCO has been trading in since 2000, the spreads have significantly declined. Furthermore, if you look at any market center in which we participate in, particularly the ECNs, we bring efficiency and liquidity into these markets reducing the execution cost for both the retail and institutional customer. Our ability to post these markets is directly related to the fee structures that the various market centers have constructed. The fees are market driven and are best kept that way as they will decrease over time.
Thank you for the opportunity to comment on the proposed Regulation NMS. If you have any questions of would like to discuss our comments further, please contact me at 312-242-4600.