October 17, 2001
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Avenue, NW
Washington, DC 20549-0609
Dear Mr. Katz,
I am writing this letter in regards to the proposed rule change in Super SOES that deals with market maker minimum refresh increment size changes and reserve size requirements. This proposed rule change has disadvantages that would disrupt the general flow of the securities market in the short term as well as in the long term.
The first concern I have is that it would eliminate transparency in the market. An institutional order to buy a big block of shares in a security can take a long time to execute if the market maker(s) executes this order in 100 share increments at the inside offer and the other market participants namely the ECNs do not wish to sell on the inside offer. This would leave smaller investors in a disadvantage since it would not only take a lot of time but also disrupt the ability of the small investor to get price improvement as a result of the decrease in the volatility of the stock. In a stock that trades an average of 20 million shares a day, an institutional order to buy 1 million shares on the inside offer with one market maker filling the order in 100 shares increments per second would almost take 3 hours to execute. This only represents about 5 percent of the average daily volume of the stock leaving the rest of 95 percent to be traded in 3 ½ hours. It would be prudent to say here that the average daily volumes of stocks would decrease as a result.
The proposed change in rule would not only decrease the average daily volumes in stocks but this decrease in volume would in turn lead to general decrease in liquidity in the market. The confidence of the small investor would dampen as a result. Since a large percentage of the working population of the country is invested in the market either through their brokerage accounts or through 401K plans, this can have devastating implications for the future health of our society.
This rule change can also affect other markets most notably the options market. Since the price of an option depends heavily on the volatility of the underlying stock, a market maker can very well influence the price of the option with the decrease in volatility of the stock. This would lead investors to find less opportunity in the options market leaving this market with less investment in the future.
The point I am trying to make is that the disadvantages of the proposed rule change greatly outweigh its advantages. This rule change would not only make the markets less efficient but also would decrease small investor confidence on the securities markets. It would leave the markets being run by institutional investors and market makers. The only way a small investor would be able to invest in the market would be through mutual funds. I hope that the commission takes all of above-mentioned points into account when it makes its decision on the proposed rule change.
Thanking you in advance for your time and consideration.
New York University
Stern School Of Business
Class of 1998