From: Kevin Bates [kevinchristopherbates@yahoo.com]
Sent: Wednesday, September 03, 2003 3:50 PM
To: rule-comments@sec.gov
Subject: Boston Option Exchange Rule Comments

     I'm a market-maker on the PCX option exchange.  I welcome the BOX.  This 
     exchange will allow market-makers that are not affiliated with order-flow 
     firms a more fair exchange to post markets.  On the PCX  the SEC has allowed 
     payment or bribery for order-flow.  Lead market-makers know which firms they  
     bribe where non-lead market-makers are in the dark.  The PCX charges market-
     makers(MM).$.60 a contract if they trade with a firm that collects bribery 
     for order-flow this can mean the difference of between a profitable trade or 
     non profitable trade giving the lead-market-maker(LMM) a large advantage.  
     If that was not enough two out of the three largest LMM's seem to pay themselves 
     out of this slush fund so the higher the payment the more profit for them and 
     the higher the barrier to competion.  The BOX will not pay this bribery so 
     orders will only be routed to the BO! X because they have the most competitive 
     prices or quick execution.  Obviously the order-flow firms are not rebating 
     this slush money to their customers and obviously the LMM's are pricing this 
     bribe money into their trading decisions so the BOX offers a venue for better 
     pricing.  This money will definitely end up in the pocket of the PUBLIC CUSTOMER .  
     The second practice that I see on a daily basis that is to the  PUBLIC CUSTOMERS 
     disadvantage in which the BOX would help to stop through it's rules is where 
     a firm accommodates a customer order at a price just away from a price that 
     anyone in the crowed will trade and if the firm does not get their hedge off 
     at a profitable price they are allowed to BUST the trade with no questions 
     asked.  This is like playing black jack and if you don't like the cards you 
     just give them back but keep your bet. On the BOX if a firm exposes their 
     order to the market the order may be trad! ed so no more listening all day 
     to floor brokers say "I don't have an order but if I did could I cross the 
     whole order at some set price".  The fact that the SEC allows order-flow firms 
     to PRE-ARRANGE TRADES then find which exchange will allow the order-flow firm 
     to put up the trade at their prices without exposing the order to open outcry 
     is beyond me.  "This I don't have an order but if I did" when the broker has 
     an order in his hand is wrong and not in the public customers best interest.  
     If it is not enough for the exchanges to pay bribes for their public customers 
     orders the order-flow firms are allowed to let their sales people call other 
     customers and say I have this PUBLIC CUSTOMER ORDER and I will allow you to 
     trade it with me if you pay 4x your normal commission is wrong in my eyes.  
     These orders could not be sent to the BOX through their rules because the 
     order-flow forms would not be guaranteed their cross.  I hope that the SEC 
     approves the ! BOX with it's rules so public customers and Market-Makers can 
     interact on an exchange without graft and deception.  Kevin Bates PCX MM


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