From: Karl Sohn [karl_sohn@hotmail.com] Sent: Friday, October 19, 2001 2:45 PM To: rule-comments@sec.gov Subject: Alert #2001-158 Karl Sohn 153 West 74th Street #3A New York, New York 10023 October 12, 2001 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Dear Mr. Katz: I am writing to protest the recent rule proposal that Nasdaq has filed with the Securities and Exchange Commission to eliminate the 1000-share display requirement when using SuperSoes reserve size. The proposed rule change would eliminate the current requirement that a quoting market participant display 1000 shares when using Nasdaq’s reserve size feature. In its place, Market Makers could display as little as 100 shares and still use Nasdaq’s reserve size. The reason Nasdaq implemented the SuperSoes system was because Market Makers did not want to be dually liable for orders under the previous Soes/Selectnet system. Because Market Makers were liable for their quotes under Soes/Selectnet, they were often unwillingly forced into giving two executions for the same quote. SuperSoes was the answer to this dilemma but allowing this rule change will effectively eliminate liability orders. Market Makers will now only be liable for 100 shares because this is all they are required to display for any size order whether it is 100 shares or 1,000,000 shares. Under the old Soes/Selectnet system, Market Makers were in theory liable for their quotes. In practice, that was often not the case. For an example if Market Maker X was quoting 5,000 shares on the inside market, he was liable for the entire 5,000 shares at that price. Under Nasdaq’s latest rule proposal, Market Makers would never display more than 100 shares because with that quote, the Market Maker could buy or sell up to 1,000,000 shares. Also, under the old Soes/Selectnet system there were Market Makers who would be on the inside market giving out 100 shares every 17 seconds effectively slowing down the market. Under this new proposal, a 1,000 share order to a Market Maker can be broken up in to 10 executions of 100 shares taking 10 times longer to fill the order. Currently if the order is first in the SuperSoes queue, the order is filled almost instantaneously. Because they will have more time to fill this order, there is a greater chance that the Market Maker will lift his quote, but will not be in any violation because the Market Maker was only liable for 100 shares. If the Market Maker lifts its quote they will effectively be removing liquidity from the market place therefore dramatically increasing volatility and decreasing the odds of getting the best price. Market Makers claim they would like to display the orders of their retail customers. However, under the Manning Rule, they can choose to execute the order or forward it to an ECN for display. The Market Makers’ retail business was not a factor before SuperSoes so why should it make a difference now? The Market Makers also claim that ECNs are allowed to display 100 shares and refresh for an infinite amount of shares. First of all, ECNs are not in the business of making markets. An ECN’s function is to display public customer orders sent for possible execution. I feel that this practice of an ECN that automatically refreshes is contrary to the goal of a more transparent market. If an ECN displays 200 shares at a certain price and executes for 5,000 shares without the quote updating (while continuing to show 200 shares) in my opinion that ECN is not truly representing the real size of the order. I feel it is wrong with ECNs and it is equally wrong with Market Makers to not represent their true order size all of which lead to a less transparent market. I would also like to take this time to voice my concern over another issue, Nasdaq’s new Quoting and Trading price schedule. This 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. In addition, there was not sufficient notice or time given between the announcement and implementation. The alert was posted on September 28, 2001 and then implemented on October 1, 2001. The Exchange Act rules require that fees and dues must be equitable among its members. Non-Market Making firms are unable to participate with the adding liquidity rebate; the charges for the SuperSoes system become inequitable. Nasdaq should introduce some way for these members to participate in the liquidity rebate. In summary, SuperSoes is only two months old and there has not been significant time to evaluate the system that took over a year to create let alone making drastic changes. Allowing the Nasdaq’s rule proposal to pass would be contrary to the notion of running a fair and orderly market and contrary to the SEC directive of transparency. Nasdaq does not have the best track record of regulating itself and the SEC’s 21A report and a $1.3 billion settlement are proof of that. Sincerely yours, Karl Sohn Series 7 _________________________________________________________________ Get your FREE download of MSN Explorer at http://explorer.msn.com/intl.asp