December 3, 2001
Mr. Jonathan G. Katz
Office of the Secretary
Mail Stop 6-9, Room 6507
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. SR-NASD-2001-66
Dear Mr. Katz:
Robertson Stephens, Inc. ("Robertson Stephens") appreciates the opportunity to comment on the amendments to NASD Rule 4710 (the "Amendments") proposed by the Nasdaq Stock Market, Inc. ("Nasdaq"). Robertson Stephens currently makes markets in approximately 500 Nasdaq National Market ("NNM") securities and consistently ranks among the top investment banks in terms of market making volume in NNM securities. Thus, Robertson Stephens believes that the Commission will find its comments useful in its consideration of the proposed Amendments.
The Nasdaq National Market Execution System ("NNMS" or "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."1 "Currently, the rules of Nasdaq's SuperSoes system prohibit the use of its reserve size functionality unless a market maker is displaying at least 1000 shares in its public quote."2 This minimum display requirement does not apply to Electronic Communications Networks ("ECNs"), which do not participate in SuperSoes as "NNMS Market Makers'3 but as "NNMS Order Entry Firm[s]"4.
Robertson Stephens is wholly in support of the proposed Amendments, for the following reasons:
Nasdaq market makers have a duty to "use reasonable diligence to ascertain the best inter-dealer market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions."5 Public knowledge of unusual supply/demand in a particular security can cause other market participants to revise their displayed quotations to price levels that would be less favorable to the customer. The purpose of the reserve size functionality is to provide market makers with a tool to limit the negative market impact associated with public knowledge of large pending securities transactions. However, the display of a 1000 share quote in the Nasdaq montage, pursuant to NASD Rule 4710, serves as an alert to other market participants of the existence of a reserve size in the SuperSoes system. Thus, the minimum display size defeats the purpose of the reserve functionality and impedes a market maker's ability to buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.
ECNs offer their subscribers reserve size functionalities that serve the same purpose as the one in the SuperSoes system. However, because ECNs, as order entry SuperSoes participants, are not subject to the reserve size display minimum, market participants cannot easily infer the existence of a reserve size. Reserve size orders placed in ECNs are less likely to impact the quoted prices for a particular security.
Robertson Stephens believes that, based on the above analysis, the current Rule places SuperSoes market makers at a competitive disadvantage, distorts the price discovery process in the Nasdaq Stockmarket and ultimately results in less efficient execution of customer orders. Further, the Rule may be contrary to the Congressional findings in Section 11A(a)(1)(C) of the Securities Exchange Act of 1934: "It is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure: (1) the economically efficient execution of securities transactions; (2) fair competition among brokers and dealers; (3) the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities; [and] (4) the practicability of brokers executing investors' orders in the best market . . . "6
In conclusion, Robertson Stephens supports the Nasdaq in its effort to level the competitive playing field for different types of market participants and to encourage more efficient price discovery mechanisms for the benefit of public customers.
Please do not hesitate to contact the undersigned if you would like to discuss these issues in further detail.
Very truly yours,
Diane P. Murphy
Robertson Stephens, Inc.
|1||Amendment No. 1, and Amendment No. 2 Thereto by the National Association of Securities Dealers, Inc. Relating to Display Requirements When Using Reserve Size in the Nasdaq National Market System, Exchange Act Release No. 34-45016, File SR-NASD-2001-66, http://www.sec.gov/rules/sro/34-45016.htm.|
|3||NASD Rule 4701(e).|
|4||NASD Rule 4701(f).|
|5||NASD Rule 2320(a).|
|6||15 U.S.C. 78k-(a)(1)(C).|