October 24, 2001
RE: Reserve Size Minimum Increment and Refreshing
Mr. Jonathan G. Katz,
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz,
I am writing you to express my concern about the proposed rule change affecting the current reserve size minimum and refreshing requirements. My name is Thomas Stengel and I have been a registered representative with Heartland Securities Corp. for over three years in which time I have seen numerous rule changes proposed and a number of them implemented.
It has been my experience
that the Securities and Exchange Commission has always kept the best interests
of the small investor as it's governing consideration in its determination of
policy for the Nasdaq National Market. By doing this, the SEC has been
able to establish a relatively even playing field compared to just a few short
years ago. Spreads have narrowed, liquidity improved, and executions have
become quicker and more efficient. A byproduct of this, and certainly a
major consideration in furthering this mission for a fair and equitable
marketplace, has been improved individual order and overall market
visibility. This being the case, I find the proposed rule change not only
contradictory to the ongoing concerns of the SEC and the philosophy behind the
recently implemented, long labored-over SuperSoes system, but also detrimental
to the interests of investors.
First, SuperSoes was implemented in part to reduce dual liability for market makers and to allow market makers to enter proprietary orders as well as agency orders for execution through SuperSoes. The idea behind this was not only to rightly protect market makers from dual liability but also to improve liquidity at the inside market by letting market makers combine both agency and proprietary orders at the same price, at the same time for faster, more efficient execution.
This being the case, what possible advantage could there be to allowing market makers to quote only 100 shares even if that market maker has reserve size available for execution at the price quoted? It certainly is not to improve liquidity or to better represent the supply or demand for a stock at the inside market price. It also cannot be to reduce undue market maker exposure as that was accomplished with the practical elimination of SelectNet as a binding order execution system. It is directly opposed to one of the original reasons for the implementation of SuperSoes, namely the execution of larger orders more quickly at the inside market.
It is not only the fact that is the responsibility of market makers to provide liquidity in the stocks in which they make a market, but it is also the responsibility of the market maker to fairly represent the orders in hand for execution for the market to see and execute against. It is not as though market makers lack the functionality to continually display 100 shares regardless of the actual size of the order to be executed currently through the use of ECNs. However, ECNs by design are anonymous. This being the case, ECNs represent no one and everyone. It is not the responsibility of ECNs to maintain markets in securities. This is the domain of the market maker. By definition, market makers are to provide liquidity in the securities in which they have the privilege to make a market. For this responsibility, market makers are well compensated with such advantages to the small investor as shorting securities on a market downtick. ! ; This rule change directly allo ws market makers to subvert the responsibility of providing liquidity and providing customers with order visibility in a fair and equitable manner.
In addition, SelectNet is for all intents and purposes a thing of the past for the small investor due to a lack of market maker exposure liability via SelectNet either at the inside market or through the market. With this, the liquidity through the inside market has been relegated to ECNs which may or may not be anywhere near the inside quote. As a result, allowing market makers to quote 100 shares when there is reserve size to be executed against serves only to disrupt the efficient, effective trading of that security at the inside market. The small investor is necessarily forced to trade through the market with an ECN quoting larger, more representative size at an inferior price in order to guarantee himself or herself any execution greater than 100 shares.
Next, allowing market makers to quote only 100 shares at the inside market regardless of actual order size not only misrepresents the actual market, it also widens effective spreads. Misrepresentative, unnecessarily small quotes will slow the natural movement of securities as investors attempt to buy or sell but only get executed for 100 shares per execution. In addition, with this added delay, other market participants have the opportunity to move their quotes without being executed against. At the other end of the spectrum, market participants through the market will not have the opportunity to sell or buy as much stock as they otherwise would be as the stock's movement in either direction is being hampered by misrepresentative quotations.
In closing, these proposed changes serve to do nothing but ensure slower, less efficient executions at inferior prices for not only the small investor but for all market participants. Order visibility is unequivocally reduced. Supply and demand for securities is misrepresented. Market maker exposure is reduced to zero. And liquidity, which is the responsibility of the market maker to provide, is greatly reduced at the inside market.
Thank you for your consideration.
Thomas A. Stengel
Heartland Securities Corp.