December 21, 2004
1236 Battery Ave.
Baltimore, Md. 21230
Jonathan Katz, Secretary
Securities Exchange Commission
450 Fifth St.
Washington, D. C. Re: Release No 34-50870 File No. S7-10-04
December 20, 2004
Dear Mr. Katz
These comments are submitted as a former Chief Economist and Senior Advisor to the SEC 1969-1982, former Chief Economist for NASD 1983-1995, former member of the Boards of Directors of Ameritrade Holding Corporation and Knight trading Group and currently as a customer of Ameritrade and a shareholder of Ameritrade and Knight Trading Group.
The Proposed Rules
By way of general comment, the NMS proposals appear to importantly increase the possibility for improvement in the operation and effectiveness of the National Market System. Nothing below is meant to detract from this very substantial effort that obviously has been made to resolve some difficult trading market issues within the Commissions regulatory framework.
However, having unsuccessfully pleaded with the SEC, DOJ and the even the Judiciary Committee in Congress to force a proper reconciliation of the goals of anti-trust laws and the Echange Act and to remove the market data access price discrimination against online investors, I have become convinced that the SEC regulatory framework needs an anti-trust division.
Barrons newspaper Dec.20, 2004, How the SEC Became Monopolists Best Friend has discovered the same problem with respect to the subject NMS issues. The Commission is failing to perform one of their most critical functions as a regulator, the fair and reasonable regulation of anti-competitive practices and the avoidance of regulations that are unnecessarily restrictive of competition.
That said, the following specific comments respecting the subject release The Release are submitted for your consideration:
Market Data System
The Release and proposed rule 603 make no mention of the current discriminatory NYSE and NASDAQ non-professional subscriber fees that are imposed upon online investors and that restrict unreasonably the access of online investors to quotations information. The terms not unreasonably discriminatory and fair and reasonable as contained in the legislative history of the Exchange Act Amendments and now included in Section 246.603 of the proposed rules pp.164,247 would seem to preclude discriminatory, differential charges for online investor access to information.
However, no changes to NMS plans are being required by the SEC to eliminate this discrimination against online investors. Moreover,
as The Release points out, the Commission in a release July 2002 required SROs to abrogate rules that permitted rebates of market data fee revenues to customers p.166. These rebates were competitions way of circumventing the arbitrary discrimination that the Commission has been unwilling to eliminate. Thus the only action of the Commission in response to requests of petitioners for relief from this discrimination has been to further protect these discriminatory and anti-competitive practices from competition.
Clearly, the discriminatory nonprofessional market data access fees applied to online investors should be eliminated without additional regulatory delay.
Order Protection, Best Execution and Price Improvement
The Commission finds quite logically and reasonably that for orders to have standing in the National Market System for trade-through protection purposes, they must be published and reachable for automatic execution on reasonably economic terms p.14,. This proposed limitation on trade-through requirements is logical and reasonable and its merits are not disputed here.
Disputed here is the SEC best execution enforcement policy that forces small order broker/dealers to search for price improvement among undisplayed NYSE floor orders that are not reflected in the NBBO. This shift in policy from searches of published quotations prices to required searches of selected caches of undisplayed orders is now challenged by the reasoning of the Commissions own trade-through price protection policy. That policy also would never ...require investors submitting marketable limit orders to access maybe quotations.... p.61 , or tolerate free riding on displayed quotations pp.38,39.
The current emphasis on price improvement in SEC best execution broker inspections rewards those investors who decline to display trading interest in the NBBO and those market centers that court such investors by refusing to use transparent, automated order display and execution processes. The Commission should recognize that best execution price improvement regulation: 1 encourages the non-display of orders, 2 reduces the transparency of the NBBO, 3 increases search costs of small investors needlessly, 4 increases the effective spreads paid by all small investor orders priced off of the NBBO, 5 is not cost beneficial, 6 is founded on invalid theories of market efficiency, 7 transfers value from small investors to large investors and the brokers who serve them and 8 it probably increases the frequency of trade-through problems.
Indeed, is not the grant of a free option to undisplayed orders on an exchange floor to step in front of a displayed bid or offer i.e. the auction a form of trade-through, or free-riding? Why should any investor market or marketable orders be required by regulators to search for maybe quotations?
By including price improvement as a best execution requirement, the SEC changed the standard for evaluating reasonable effort from published quotations to something less certain and unreasonably costly to the small investor side of the market. Forcing a search for trade price improvement brings into play issues of quotation transparency, gross net price reporting differencesdealer trade prices are net of market center costs agency trade prices are not, search cost impacts, automatic versus manual execution differences, NBBO impacts, and unfairness to those whose published bids are missing executions because undisplayed orders are given a special standing in the market by regulators.
Moreover, the policy shifts competition from real quote and price competition to competition in the generation of price improvement statistics by market centers.
There is a real conflict between the NMS trade and quotation policies in the subject release and those applied in Best execution enforcement.
Thank you for your consideration of these comments.
Gene L. Finn