October 16, 2001
284 Mott Street Apt 9F
New York, NY 10012
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: NASD Head Trader Alert #2001-158 and Alert #2001-153
Dear Mr. Katz:
I write concerning the NASD's proposed changes to the SuperSoes Reserve Size Display Requirement and Refresh Increment Changes as detailed in NASD's Head Trader Alert #2001-158, dated October 9, 2001, and also with regards to its revised pricing structure filed September 28th, 2001 and detailed in Alert #2001-153. I am a registered representative (Series 7 and 63) trading customer accounts, and hold a Bachelor of Science degree in Applied Mathematics from Yale University. I believe the proposed changes would hurt my customers, be detrimental to the fair and orderly operations of the Nasdaq marketplace, violate SEC regulations and directives, and create an unfair advantage for market makers over other market participants.
Concerning Alert #2001-158, the NASD has in the past stated that "many factors should be considered...when evaluating market quality, such as: trading costs, speed of execution, liquidity, and transparency." (Head Trader Alert #2001-05 - January 9, 2001) Reducing the reserve size display requirements and refresh increments will certainly adversely affect the speed of execution and transparency. Currently, a 1000 share order executed against reserve size is executed immediately as a single 1000 share transaction. Reducing refresh size to 100 will split this order into 10 transactions of 100 shares each, and as a result take 10 times as long to execute. Increased execution time is also contrary to one of the stated benefits of SuperSoes, that is, "reduced interval delay between executions against the same market maker..." (Head Trader Alert #2000-06 - January 31, 2000) The changes would also have the effect of obscuring even further the true size of a market maker order. I believe any use of reserve size is contrary to the SEC directive of transparency, and to enable market makers to further disguise their orders makes the market even less fair.
Among the stated goals of SuperSoes was to remove the dual liability market makers were subject to. In addition to the drawbacks of the proposal already discussed, the increased execution time will enable market makers to withdraw quotations which otherwise would have been executed against immediately, effectively reducing their liability even further. It has been shown that market makers cannot be trusted to police themselves, and I fear they would use this reduced liability to the detriment of other market participants. As an example, in my own experience prior to implementation of SuperSoes, market makers would routinely interfere with the natural and orderly functioning of the market by exploiting the old Soes liability rules. Specifically, in a stock rapidly increasing in price, with ECNs displaying bids with significant price improvement over the offer, a market maker would display a refreshing offer of 100 shares, and would sell only the required 100 shares every 17 seconds. Despite attempts to trade with said market maker via Soes and SelectNet , the market maker would remain and sell only the minimum required, and ECNs were forced to lock up the market to obtain stock in a timely manner. While adhering to the letter of Soes regulations, market makers were flouting their spirit when engaged in artificially depressing the offer. I fear activities such as this could resume if the proposed SuperSoes rule changes are approved.
Market makers claim that the changes will benefit their retail customers. I see no evidence that this would be true. It is unlikely a retail customer would request a market maker to specifically sell their stock 100 shares at a time. Also, market makers do not have to display orders from their retail customers. Under the Manning Rule, they can execute the order or submit it to an ECN for display.
Concerning Alert #2001-153, the NASD claims the new pricing plan `provides fairer treatment to all participants', and that `some market participants charge fees to access their liquidity while others do not, making the landscape of the marketplace uneven.' Market makers enjoy several privileges not available to market participants such as ECNs, which must charge fees to make profits. For example, market makers have the benefit of profiting from the spread involved in making markets, and they can short stock on a down arrow. ECN fees actually create a more equitable market, and the proposed SuperSoes fees will disrupt that balance. In fact, the new pricing plan would be a violation of Section 15A(b)(6) of the 1934 Exchange Act, because it would create a pricing structure that is discriminatory to NASD members who do not make markets. The purpose of ECNs is merely to display public customer orders, not make markets, and they would not be able to receive payment for providing liquidity. There should be some mechanism which would provide a liquidity rebate for non-market makers.
In addition, there was insufficient notice given before implementation of the pricing plan. Nasdaq filed for immediate effectiveness, which I believe should be rejected due to violation of Section 15A(b)(6), as addressed above, and rule 15(A)(b)(5) which requires that fees and dues be equitable among its members. Non-market making firms are unable to receive the rebate for adding liquidity, making the new SuperSoes fees inequitable.
Finally, the NASD seeks to make substantial alterations to a system that has been operational for less than 3 months after being in development and testing for one and a half years. In fact, given the depressed volume in August, the first month of SuperSoes, and the tragic disruptions to the market in September, SuperSoes has been in operation for only one month during normal market conditions. I believe more data is required before any changes are made.
Thank you for your time and for considering my concerns regarding Nasdaq's proposed rule changes and revised pricing structure.