Monadnock Capital Management, LP
1900 Market Street, Suite 616, Phila., PA 19103 * 215-405-7281
February 11, 2003
Mr. Jonathan Katz
United States Securities and Exchange Commission
Room 6000, Mail Stop 0601
450 Fifth Street N.W.
Washington, DC 20549
Re: SEC Act Release 47186 (Jan. 14, 2003), 68 FR 3062 (Jan. 22, 2003) (SR-BSE-2002-15)
Dear Mr. Katz:
The purpose of this letter is to express our opposition to the recent application to establish an options exchange in Boston, Massachusetts.
We respectfully request the Commission to carefully consider the reasons we oppose the creation of another options exchange.
A primary concern is the impact of adding a new venue to an already saturated arena, at a time when the trading environment is weak and the revenue base of existing exchanges is deteriorating. At present, public and corporate customers can route orders through five options exchanges. These exchanges provide vigorous competition, as well as more than adequate choices for the execution of orders. To introduce another player to the field would further strain the resources of already established exchanges and would certainly jeopardize the success of any new exchange by fragmenting order flow to a point where few are able to sustain the cost of operations. Therefore, the long-term impact of a new options exchange would be fewer exchanges and lessened competition, thus harming the public customer.
In addition, existing options exchanges have been financially burdened by the cost of implementing Securities and Exchange Commission (SEC) regulatory requirements without any monetary compensation from the Commission. Ever increasing regulatory demands on the exchanges have resulted in the need to impose fees which have proven prohibitory to many of the member firms and have forced many excellent competitors to leave the marketplace. In addition, the obligation of the exchanges to cover the costs of overseeing SEC policies has had the effect of forcing exchanges to divert funds from upgrades and system innovations, as well as basic improvements in exchange facilities, thereby hindering the opportunity to plan for a future which will allow U.S. exchanges to maintain a competitive edge in the world marketplace. Further adding to these already cumbersome financial constraints by introducing another exchange to bleed away revenue and splinter order flow into nonviable shares of the options market would be injudicious, short sighted and would surely harm the marketplace in the long run.
Another alarming issue, which is part of the proposal for the Boston Options Exchange, is the intent to implement a three-second exposure time. This most certainly will result in internalization on that Exchange, which lessens the possibility of price improvement and reduces market liquidity. Both of these results are clearly harmful to public interest. Of course this three-second proposal is designed to attract business and will, in turn, force other exchanges to match. Therefore, we must ask ourselves, when does spirited competition collapse into unfettered degeneration of the markets and unethical practices, resulting in the further erosion of public confidence in what is already perceived as a disreputable marketplace?
In conclusion, while we believe competition is good for the market in general, growth must be considered in light of how it will affect the whole industry, the well-being of the investing public, and the need to reestablish the appearance of propriety.
The time to act is now, not after the devastating results of over extending the options market becomes a glaring error to the both the public and financial professionals.
We urge the Commission to inspire public confidence by taking a definitive stand against the further fragmentation of the market, which has resulted in the unregulated growth of questionable practices, endangered the health of the financial industry, and created an uncertain economic climate in our country.
We appreciate this opportunity to express our opinions, and thank you for your time and consideration. Please do not hesitate to contact me at 215-405-7280, should you have any questions.
Daniel C. Bigelow
Monadnock Capital Management