January 12, 2005
Subject: File No. S7-10-04
United States Securities and Exchange Commission
Re: File No. S7-10-04 Proposed Rule on Regulation NMS
I am writing today to provide comment on the SECs proposed overhaul of the American capital markets, otherwise known as Regulation NMS.
While there can be no doubt that our domestic markets are long overdue for modernization, I am deeply concerned that, in the effort to bring efficiency and transparency to the systems which are now in place, the very real possibility exists that we may well compromise and potentially even destroy the very mechanism which has, for so long served our country so admirably. The United States free markets have, for over two hundred years, been the worlds gold standard in the creation of capital. As such, they have provided the bedrock for tens of thousands of businesses, small and large, to build themselves into the engines of productivity that power free enterprise. I believe it is critical that the strength and power of our markets be maintained. It is for this reason that I now ask that the SEC take the greatest of care as they complete their overhaul of our National Market System.
According to the November revision of the proposal first put forth, the SEC has proposed two potential versions of Reg NMS. In the first iteration, the protection of best price is paramount. Under this version of the proposal, the national best bid and offer cannot be traded through by an inferior price provided that the markets involved are deemed fast markets. Under the second version of the proposal, what amounts to a virtual CLOB Central Limit Order Book is proposed where all orders at all prices must be exposed at all times.
While I fully support the first version of the proposal, I believe that a virtual CLOB would inevitably lead to a radical contraction of liquidity as investors avoid exposure of their positions. This would, in turn, lead to the elimination of competition between markets, internalization of orders and ultimately degrade the system resulting in blatant payment for order flow. In effect, a nationalized market system would be created, leading domestic and international investors to take their capital requirements to other venues far away from our shores. Our domestic markets would quickly be hobbled and we would lose our position in the financial world.
In addition, the staggering cost of implementing such a system, both in terms of time and money has not been realistically factored in. In short, this version of NMS is, in my view, potentially disastrous. In addition, the CLOB proposal would instantly render unworkable the NYSEs Hybrid Market proposal. The Hybrid Market was crafted over a period of many months with the cooperation of the SEC in an effort to fully integrate the strength of the current open outcry specialist auction system with the speed and efficiency of automated trading. The specialist system is a critical link in the capital chain providing liquidity and adding an indispensible element to true best price discovery. While it may be true that some individuals within the system have abused their responsibility, the cost of disposing of a system which has for many decades, reliably provided the markets with a critical smoothing action and repeatedly averted tremendous losses is simply too high to reconcile. If one takes the aggregate cost of those abuses to investors and distibutes it over one trading year, the cost per share, per investor is so small as to be virtually immeasurable. Institutions have often called for measures that would effectively limit competition between markets, couching their desire to fill orders internally in rhetoric but we must remember that their interest is often their own - not their clients. Individuals must have the right to true best price and a free market. The United States capital market has been the envy of the world since this country came into being.
By all means, we must bring our market up to date but let us not destroy it by fixing what is not broken.