Chairman, Trading Issues Committee
Security Trader's Association
December 13, 2001
Via Electronic Mail and
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. SR-NASD-2001-66
The Security Traders Association ("STA")1 welcomes this opportunity to provide the following comments on the proposed rule change filed by the National Association of Securities Dealers, Inc. ("NASD") through its subsidiary The Nasdaq Stock Market, Inc. ("Nasdaq"), with the Securities and Exchange Commission (the "Commission"). Nasdaq proposes to amend NASD Rule 4710 to reduce the 1000 share display size requirement to 100 shares for using the reserve size functionality in the Nasdaq National Market Execution System ("SuperSOES").2 The STA supports the Proposed Amendment and believes it will promote fair competition across competing market centers and will promote a more fair and orderly national market system.
SuperSOES allows market makers to divide quoted share amounts submitted to the system between those shares they direct to display publicly in the Nasdaq montage and the shares they desire to keep in reserve. Known as "reserve size," these shares are available for execution through SuperSOES, but are not publicly displayed. Reserve size is an important tool for market participants seeking to execute large sized orders while limiting the negative market price impacts associated with public knowledge of the attempted sales or purchases.
Currently, NASD rules prohibit the use of the SuperSOES reserve size functionality unless a market maker is publicly displaying at least 1000 shares in its quote. This requirement was initially imposed to encourage the display of larger sized orders. However, the implementation of trading in decimal increments with a penny minimum price variation has resulted in a diffusion of trading interest and liquidity across multiple price-points. The resulting thinning of liquidity due to the greatly expanded number of price points has created a disincentive for market participants to display continuously large sized orders at a single price level.
Nasdaq, however, is the only market center that imposes such a display obligation. Other market centers trading Nasdaq securities including regional exchanges, alternative-trading systems, and electronic communications networks, do not have the same minimum same size requirement for their reserve size functionality. These other market centers and exchanges trading Nasdaq securities under the UTP Plan have rules and execution systems that allow their members to use reserve size without a 1000-share display requirement. Consequently, the current NASD rules place Nasdaq market participants at a competitive disadvantage to the members of other exchanges trading Nasdaq issues pursuant to the joint transaction reporting plan for Nasdaq/National Market ("Nasdaq/NM") securities on an unlisted or listed basis (the "UTP Plan").
Nasdaq proposes to eliminate the 1000-share display requirement for the SuperSOES reserve size functionality.3 Under the Proposed Amendment, market makers would be permitted to use SuperSOES' reserve size functionality anytime they display a quote of at least one round lot (100 shares). Nasdaq would continue its policy of allowing the use of reserve size even if a particular displayed quotation dropped below 100 shares based on partial, interim, executions against that un-updated quote.
The STA believes eliminating the 1000-share display requirement will level the field of competition between members of exchanges trading Nasdaq securities pursuant to the UTP Plan and Nasdaq market participants. Moreover, eliminating the 1000-share requirement will level the field of competition between Nasdaq, and its primary competitors, the ECNs and the regional exchanges. STA believes that by allowing the Nasdaq to offer its market participants reserve size functionality similar to that offered by exchanges offering the trading of Nasdaq issues under the UTP Plan, the Commission will facilitate the goals of the national market system while encouraging the display of trading interests.
In conclusion, the STA believes the Proposed Amendment is consistent with the purposes of the Securities and Exchange Act. Specifically, we believe the proposal is designed to prevent fraudulent and manipulative acts and practices, and to promote just and equitable principles of trade, while promoting a fair and orderly market and national market system.
We hope the Commission and staff find these comments helpful. If the STA can be of further assistance to you on this matter, please do not hesitate to contact us at the telephone number above.
Very truly yours,
|Michael T. Bird
Security Trader's Association
| John C. Giesea
Security Trader's Association
cc: Hon. Harvey Pitt
Hon. Laura S. Unger
Hon. Isaac C. Hunt, Jr.
Robert L.D. Colby
|1||The STA is a professional trade organization that works to improve the ethics, business standards and working environment for members, who are engaged in the buying, selling and trading of securities. Our 7500 members belong to one of 29 affiliate organizations, nationally and internationally, making STA the largest organization of its kind in the world.|
|2||Exchange Act Release No. 45016 (Nov. 5, 2001), __ Fed. Reg. _____ (Dec. __, 2001) (the "Proposed Amendment").|
|3||For purposes of the rule, the term "reserved size" means that a Market Maker or a customer thereof wishes to display publicly part of the full size of its order or interest with the remainder held in reserve on an undisplayed basis to be displayed in whole or in part as the displayed part is executed. To utilize the reserve size function, a minimum of 100 shares must initially be displayed in the market maker's quote (including the Agency Quote), and the quotation must be refreshed to 100 shares.|