603 Willow Valley
Lamar CO 81052
Jonathon Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.,
Washington D.C. 20549-0609
Via E-mail: firstname.lastname@example.org
Dear Mr. Katz,
I send these comments on SEC proposed rule Release No. 34-43084, File No. S7-16-00: Disclosure of Order Routing and Execution Practices.
In Section II of the proposal, the Commission states, "approximately 85% of the executed market orders in Nasdaq securities are routed to market centers when they are not quoting at the best price." Since the Commission has studied the execution of orders and found that 85% of them are not being properly executed, then clearly there is something wrong with the system. The fact that orders cannot be executed at the best price is solid evidence of an underlying problem in the system.
The Commission also states in Section II, "the duty [of best execution] requires a broker to seek the most favorable terms reasonably available under the circumstances for a customer's transaction." How can a broker possibly find the most favorable terms for her clients when so many trading venues are available? A broker cannot check each venue before sending out an order. The SEC is not allowing brokers to practice their duty of best execution by allowing the market to remain fragmented.
Requiring disclosure of order executions will not fix the best price problem. Disclosure will only re-emphasize to investors worldwide that the problem exists. The SEC is responsible for providing investors with an unbiased market in which to trade securities. If 85% of investor's orders are not being executed at the best price, then the Commission needs to act immediately to change the way orders are routed.
Disclosing information on order executions without fixing the underlying problem is like driving a car for months on end with the "service engine soon" light on. The driver knows there is a problem with the engine and that fact is continually disclosed to them, yet they refuse to service the engine in order to fix the impending breakdown. The SEC needs to service the "engine" it controls. Disclosure is only a temporary band-aid; this engine needs a total overhaul. The SEC should restructure the market immediately, or allow private enterprise to create a common market.
If a national market did exist, there would be no need to disclose the routing of orders; all buys and sells would be sent to the national market. A single market would offer high liquidity for traders because every bid and offer for a security can be seen in one place. Accurate prices would therefore be a by-product of this market. News firms would no longer have to decide which markets to quote prices from. Instead, they would get their quotes from the central market. Under one trading system, there would only be a single price for a particular security at a moment in time. Currently, under the fragmented market system, several different quotes for a single security can be found at one moment in time. This disparity of quotes is not fair to investors.
In Section III, Part A, the Commission mentions that other statistical analyses of U.S. equity trading have been previously published. These studies used statistical data from the current markets to disclose trade information. However, because each market uses a different set of statistics, the analysis was not useful to investors. The investors were not able to compare "apples to apples." If a single market existed, the SEC could easily monitor the executions of trades because the whole system would be based on one set of statistics. The SEC would be responsible for monitoring only one market instead of a fragmented mess of markets. Resources, both human and technological, could be combined to focus on the single market.
The also states in Part A that, "by putting this information in the hands of investors and others, the rules proposed today are intended to energize competitive forces that will produce a fairer and more efficient national market system." The only competitive forces that should exist in a securities trading market should be the sell bids versus the buy bids for each security. Individual brokers do not provide the competition itself; they just offer the bids. They can do this more efficiently under a single market system.
If investors were to read the disclosed information and determine that Security A gets the best price on Exchange Y and Security B gets the best price on Exchange Z, are they going to tell their broker where to route each and every order? No investor has the time to do this. Investors could also change brokers the brokerage firm that, according to the disclosure, has the best pricing executions. Switching a portfolio from broker to broker each 6 months would not be cost effective. Thus, investors do not really gain from disclosure because it is impractical to act on the information gained from disclosure.
Of course, one of the main concerns of creating a common market is the SEC's ability to regulate such a beast. If the SEC can cooperate with private firms and other regulatory firms when creating a national market, then they can simultaneously create the rules to regulate the national market. Another concern is if the single market has a computer failure, then the whole trading system will crash. Given the current technology and backup systems available to trading systems, this concern can be dealt with. Even the existing markets today experience some shut downs when computers fail. A national market system would be developed on the most secure computing devices available, with minimal chances of a market failure. The SEC has the resources to build the national market system; they just don't want to take the bull by the horns.
The SEC's assignment to create national Market System is long overdue. It's time to hand in the rough drafts and the research and let the markets decide how to trade. No investor will allow a biased market to operate because they will simply stop using such a market.