September 23, 2004
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549-0609
Notice of Filing of Proposed Rule Change Relating to Revisions to Amex Rule
Dear Mr. Katz:
I applaud the American Stock Exchange AMEX proposed rule amendment Rule 154 which would in effect prohibit the AMEX Specialists from charging for the cancellation of orders. Unfortunately, given electronic execution systems today, the amendment does not go far enough. The rule continues to allow the specialist to charge for orders options as well as stock that are entered through the exchanges electronic order routing system if the order is executed more than two minutes from the time of receipt on the books. The rule amendment filing then goes on to assert several instances where the specialist may charge members and member organizations a commission. In general, the specialist can charge the commission when the order requires special handling, or when the specialist provides a service. On page six of the filing paragraph at the top of the page the AMEX in its reasoning asserts, The Exchange believes it may be appropriate for the specialist to charge a commission in these circumstances when the order is in the book for more than two minutes and the order is automatically executed against an incoming order or some trading interest other than that of the specialist because the specialist has assumed responsibility for the proper execution of the order. Herein lies the true flaw. With todays AMEX order entry system the specialist does not provide additional handling, or an additional service for an order execution in thirty seconds or two hours and thirty seconds. The specialist has no greater or less duty to handle the order properly regardless of the time frame of the execution.
This Two Minute Rule is not like any of the other exceptions listed on page two of the filing where the specialist may actually have to provide special handling or services to facilitate the actual execution of the order, for example, when the order is Market on Close, Tick Sensitive, Stop or Stop Limit, Immediate or Cancel, etc, etc. Even in the AMEXs own filing, when asserting reasons for not allowing the specialist to charge for cancellation the exchange states, This change in commission billing practice charging for cancellation would result in the specialist charging commissions for orders that are executed automatically by the exchanges system. In other word, the specialist does not handle or provide a service that would warrant a commission. The same is true of orders executed more than two minutes after receipt into the book. The premise of a time horizon to charge a commission relates to an earlier time in the securities business when orders were not handled electronically and the specialist may have actually provided a material service. Here the justification that a commission can be charged because the specialist must handle the order properly is a red herring. By the way, notice that the rule would prohibit the specialist from charging a commission for day orders that expired unfilled-do they require any less handling or service than orders that are filled particularly when the orders in question are electronically executed?
But, the above, says nothing of the adverse consequences to the retail customer if in light of the efforts by certain specialist firms to charge a commission the AMEX fails to amend Rule 154 to completely protect the public. To be fully protected the specialist should not be allowed to charge for cancellations, or for orders on the book requiring more than two minutes to be executed. Below are several of the unintended negative consequences that will ensue if the AMEX rule is not further amended to prohibit the specialist to charge for executions on the book no matter what the timeframe:
1. There will be inadequate clear disclosure to the public of which orders will be assessed a commission and which orders will not.
2. After two minutes the public will be forced to either lose their priority in the book by canceling their order, or maintain their priority and incur a commission if the order is ultimately executed after two minutes.
3. The specialist will be in a better position to interposition himself between customers because customers will be forced to cancel their orders before two minutes in order to avoid an execution commission. In this window of cancellation, the specialist is in a position to step in front of the customer if an order that would have provided a fill to the customer enters the book.
4. Imposition of the After Two Minute Commission will reduce the depth and liquidity of the market and the natural competition from all sources to provide the tightest possible markets at all times.
5. The specialist will be able to charge some customers and rebate pay for order flow other retail customers thereby potentially engaging in discriminatory pricing.
In conclusion, the AMEX amendment to Rule 154 should be broadened to prevent the specialist from charging a commission on a timeframe basis when an order is booked whether it be two minutes or two hours. Such orders do not require material specialist handling nor does the specialist provide a service. The specialist does not materially facilitate the trade the trade is automatically executed. Moreover, allowing the specialist to charge a commission in the aforementioned circumstances opens the public to an array of possible abuses that include: reduced price disclosure, reduced customer time priority, less competitively produced pricing, less depth and liquidity to the markets, a greater likelihood of interpositioning by the specialist, and the potential for discriminatory pricing by affectively charging different customers different commissions directly or through rebates.
I hope the AMEX and the SEC will take the time to be thorough in considering the impending amendment to Rule 154 and to broaden it as heretofore advocated to fully protect the public. Thank you for your consideration.
Charles B. Cox III
For further discussion please feel free to contact me at 312 362-4186.