June 28, 2002
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Mr. Jonathan Katz, Secretary
Re: SEC File No. SR-NASD-2001-90
Ladies and Gentlemen:
Bloomberg Tradebook LLC ("Bloomberg Tradebook")1 appreciates the opportunity to comment, in response to the request by the Securities and Exchange Commission (the "Commission") in Securities Exchange Act Release No. 45991 (May 28, 2002) (the "ADF Amendment Release") on Amendment No. 2 to a proposed rule change filed with the Commission by NASD, Inc. ("NASD") relating to Nasdaq's proposed separation from NASD and the establishment of NASD's Alternative Display Facility (the "ADF").
The ADF proposal holds the promise for an OTC market that will encourage competition and innovation, provided the Commission remains an active and vigilant participant in the process. NASD's obligation to construct the ADF arises from the Exchange Act itself and NASD's obligation to regulate the ADF fairly and impartially plainly derives from the Commission 1996 Order and the related consent decree. NASD's continued proprietary interest in Nasdaq and the interlocking directorates between NASD and Nasdaq compromise NASD's ability to regulate independently and impartially regulate both the ADF and the new Nasdaq exchange.
NASD is not in compliance with the Commission's 1996 Order and the related consent decree. We reiterate our request that the Commission require NASD to take more active steps to disengage itself from its institutional and financial connections to Nasdaq. Unless it is independent, NASD will not be able to instill confidence that the ADF will be operated as a commercially viable and competitive alternative to the government-supported SuperMontage monopoly.
The ADF proposal has raised a number of market issues that remain unresolved. The most important of these are issues raised by proposed rules governing (i) locked and crossed markets, (ii) short-sale rules, (iii) voluntary participation in the Intermarket Trading System and (iv) determinations of when a transaction has taken place on another exchange. These issues underscore the extent to which the ADF ought to be evaluated as a whole and in relation to the overall market structure. We respectfully suggest the Commission must address these issues before the ADF is approved. In considering these market-structure issues, we urge the Commission to consider the ADF, not piecemeal, but taken together as a whole, including NASD's proposed fee structure for the ADF, to assess the merits of the overall proposal and the reasonable likelihood that the ADF will offer a viable facility for a robust OTC market.
We respectfully submit that a design for an ADF, no matter how well conceived or how thoroughly tested internally, is not enough, for the following reasons:
FIRST, full consideration of the proposal requires publication and review of the technical specifications of the system together with internal testing data.
SECOND, to satisfy the requirements of the Exchange Act and meet the needs of the securities markets and investors, the ADF must be put in place and tested and it must work before SuperMontage is permitted to launch.
THIRD, regardless of when the ADF becomes operational, we urge the Commission to require Nasdaq, once it launches SuperMontage, to provide SelectNet linkage to market participants quoting in the ADF for at least four months after ADF is launched, as a means to facilitate and encourage potential participants to connect to and participate in the new OTC market.
This rule filing raises such fundamental questions, questions as yet unanswered, that the Commission does not have a legally sufficient basis, on the current record, to approve the rule filing. The deliberative, informative process the Congress envisioned in its design of Section 19(b) of the Exchange Act has simply not been allowed to work in this instance. The Commission should insist the NASD remedy the problems outlined above in a further amendment to this filing before the Commission determines whether to approve it or to enter proceedings contemplating possible disapproval.
II. NASD HAS NOT RESPONDED ADEQUATELY TO QUESTIONS REGARDING ITS INDEPENDENCE AND IMPARTIALITY.
As we stated in our letters to the Commission regarding both the original ADF proposal2 and the proposed fee structure for the ADF,3 Bloomberg Tradebook fully supports the establishment of the ADF and considers NASD's proposal for the ADF conceptually sound. We called the Commission's attention, however, to issues raised by NASD's proposal the resolution of which we considered essential to the Commission's evaluation of the ADF. In the ADF Amendment Release, NASD, referring to its responses to comments of Bloomberg Tradebook and others regarding the original ADF proposal, states "[w]e believe that the foregoing fully responds to material issues raised by the commenters."4 Certain responses contained in the ADF Amendment Release are helpful, but NASD has not resolved the most important issues for the ADF to be a fully functional and viable alternative to SuperMontage.
NASD's ADF proposal, as amended, does not comply with the Commission's Order of August 8, 1996 (the "1996 Order")5 and the related consent decree, nor does it comply with the conditions set forth by the Commission in Securities Exchange Act Release No. 43863 (January 19, 2001) approving SuperMontage (the "SuperMontage Approval Order").
In the ADF Amendment Release, following a discussion of its obligations under the Exchange Act, NASD states that it believes that "the ADF rules satisfy the statutory requirements."6 Nowhere in the ADF Amendment Release does NASD demonstrate that it is complying with its obligation, under the Exchange Act and the 1996 Order and related consent decree, to be independent and impartial. Instead, NASD offers the following statement:
NASD no longer holds any common stock in Nasdaq, except the stock that underlies the warrants issued in the Nasdaq private placement. The management of NASD and Nasdaq are already completely independent - the only NASD control over Nasdaq is that required by the Commission until Nasdaq becomes a registered exchange. By the time the ADF goes live, assuming Nasdaq has been granted approval for its exchange registration, Nasdaq and NASD will have separate boards and will be fully independent in their decision-making. Moreover, the NASD Board of Governors established a special Fairness Committee to ensure fairness during the restructuring of the NASD, including the Nasdaq spin-off. NASD negotiated its regulatory services contract with Nasdaq at arms length - the terms are proprietary, and we believe need not be revealed to assess this rule proposal.7
We respectfully submit to the Commission that NASD's statement is wrong as to the need to disclose the regulatory services contract and disingenuous at best with respect to the purported independence of NASD and Nasdaq. Whether or not the regulatory services contract was, as claimed, negotiated at arm's length is beside the point. The agreement itself should be made public as part of this rule filing, if not otherwise, since it is fundamentally relevant to the Commission's understanding and to the public's understanding of the relationship between NASD and Nasdaq. Among other things, the economic motivations built into the services contract between them are certainly relevant to an understanding of how the rules are going to work as a practical matter. For NASD to assert that the contract is "proprietary" and that the terms of the contract are no one's business but theirs is an affront to the Commission and the public. Given the public role NASD plays as the policeman of the nation's second largest equity securities markets, cloaking the NASD/Nasdaq relationship in secrecy is hardly appropriate, to say the least.
How long does Nasdaq propose to keep the contract secret. What does it consider will be its disclosure obligations under the federal securities laws with respect to its stock once it goes public? The Commission has held that a public company is not permitted to conceal material information about significant contracts, even where the company "[is] acting as agent for the United States for the purpose of secrecy and to provide cover to a classified project affecting the national security of the United States."8 We respectfully suggest that NASD and Nasdaq do not have any greater interest in secrecy than is presented, for example, by the national security of this country.
The NASD's assertion of independence also warrants scrutiny. Underlying the warrants held by NASD are 43.2 million shares of Nasdaq common stock, a significant ownership interest in Nasdaq representing a considerable stake on the part of NASD in the success of Nasdaq as a stock exchange. In addition, when NASD sold 33.7 million shares of Nasdaq common stock to Nasdaq earlier this year, it received approximately $440 million, payable in a combination of cash and the issuance to NASD of two newly issued series of Nasdaq preferred stock.9 NASD's holdings, even after it relinquishes voting control over Nasdaq following its exchange approval, represent a substantial and continuing economic interest in the success of Nasdaq.
NASD asserts in the ADF Amendment Release that NASD and Nasdaq will have separate boards fully independent in their decision-making. While NASD and Nasdaq have reduced the degree of interlock between their boards since last year, it is still considerable and begs the question why there need be any interlock at all if NASD is not proposing to favor Nasdaq over other market venues. Indeed, it might be thought that NASD has representation on the Nasdaq board precisely to protect its continuing economic stake in Nasdaq's success. As of May 2002, Hardwick Simmons was both chairman of Nasdaq and a member of the NASD board and Messrs. H. Furlong Baldwin, John D. Markese, and Richard C. Romano were members of both boards.10 Indeed, we understand the NASD and Nasdaq board meetings are held back-to-back in the same location to facilitate the attendance by the interlocking directors.
The Commission should question whether boards that are comprised of members with interests in both NASD and Nasdaq, even "public" members, can be truly separate and independent, particularly where the Chairman of the Board of Nasdaq is represented on the NASD board. The interlocking directorate represents a means of influence that the NASD board members have on the Nasdaq board, and vice versa. None of Nasdaq's feared competitors are so blessed. Nor should the Commission or the public be reassured by NASD's assertion that its board of governors has named a Fairness Committee. NASD has not provided any information in the ADF Amendment Release regarding the composition of the Fairness Committee and the scope of its authority. Public companies that appoint fairness committees typically do not attempt to conceal the identities of the committee members. As a self-regulatory organization with statutory responsibilities that go well beyond any duties of the normal public company, NASD have at least as great a disclosure responsibility.
In the ADF Amendment Release, NASD, referring to the SuperMontage Approval Order, states that "[t]he ADF proposal satisfies the Commission's order . . . ."11 The third condition in the SuperMontage Approval Order, however, requires:
that participation in SuperMontage will be entirely voluntary, because NASD quotes will be included in the Nasdaq quotation management system while Nasdaq is the exclusive SIP, but only for display purposes, and the NASD will provide access to its quotes on a market-neutral basis."[emphasis added] 12
The question of independence is relevant to the issue of whether NASD has any serious intention to make the ADF a viable competitor of Nasdaq. We note that neither in its original ADF proposal nor in the ADF Amendment Release has NASD indicated that it has taken appropriate steps together with Nasdaq to meet this critical condition.13 We understand, moreover, that NASD and Nasdaq celebrated their "separation" from one another with the joyous observation that NASD would now be out of the business of running market facilities. With an interlocking directorate between NASD and Nasdaq and with a considerable majority of the key officers of Nasdaq being current or former NASD officers who retain close ties to those left behind in NASD (e.g., Richard Ketchum, Alfred Berkeley, Dean Furbush, John Hilley, Edward Knight, John Wall and Frank Zarb), NASD is not sufficiently independent of Nasdaq to create an OTC market offering a commercially viable alternative to Nasdaq and other exchanges. The senior officers and the industry members of NASD's board (or the companies that employ them) are significant shareholders with strong institutional ties to Nasdaq. The ADF, if successful, could compete directly with Nasdaq and diminish the economic rewards for those officers and shareholders.
The result is a real potential for conflict of interest within NASD. That poses a challenge not only to the strength of its institutional commitment to the ADF but also to its independence as the rule-making body and, through NASD-R, the regulator of both Nasdaq and the ADF. NASD's proposed ADF amendments do not adequately respond to these concerns.
As we stated in our letter to the Commission of February 7, 2002,14 the ADF must be an independent marketplace if it is to be a credible alternative to the Nasdaq stock exchange and other exchanges,. That, in turn, requires that NASD itself be independent of Nasdaq. To ensure NASD's independence and the confidence of market participants in the ADF, we again urge the Commission, consistently with the principles and goals of the 1996 Order and related consent decree, to consider requiring NASD to fully divest itself of its holdings in the Nasdaq stock market. We suggest the following:
FIRST, members of NASD board should not serve simultaneously on the boards of NASD and of Nasdaq.
SECOND, if there is to be a Fairness Committee to oversee the relation between NASD and Nasdaq, the SEC ensure that the composition of that committee be such that it is truly independent in its deliberations.
THIRD, we respectfully recommend that the Commission require NASD to comply fully with the conditions in the SuperMontage Approval Order, including the requirement that the entire ADF montage be displayed on Nasdaq's SuperMontage for as long as Nasdaq remains the exclusive SIP.
III. THE ADF SHOULD NOT BE APPROVED BEFORE THE COMMISSION RESOLVES KEY MARKET-STRUCTURE ISSUES RAISED BY NASD'S PROPOSAL.
A key component of NASD's ADF proposal is that participation in the Intermarket Trading System (the "ITS") be optional for ADF market participants. In the ADF Amendment Release, NASD reports that the American Stock Exchange (the "Amex"), NASD's own subsidiary, believes the proposal improperly allows market participants that trade exchange-listed securities to avoid the trade-through restrictions currently imposed on ITS market-makers. The Amex asserts that the rule proposal is contrary to NASD's own obligations under the ITS plan. NASD responds that it disagrees with Amex but does not address the issue in the ADF Amendment Release "because the ITS plan is currently the subject of adjudicatory and rulemaking proceedings before the Commission."15
Another fundamental market-structure issue raised by the ADF proposal has to do with rules governing locked and crossed markets. Bloomberg has suggested that the proposed rule governing locked and crossed quotations should be consistent across markets. NASD states it supports our proposal, but it adds that "NASD cannot impose it unilaterally - it would require action by national market plan participants or by the SEC."16
The New York Stock Exchange (the "NYSE") has criticized proposed NASD Rules 4633 and 6420 governing generally trade reporting for transactions effected "otherwise than on an exchange." As proposed, the rules define "otherwise than on an exchange" to mean a trade effected by an NASD member otherwise than on or through a national securities exchange. The proposed rules leave the determination of what constitutes "on or through" a particular exchange to the respective exchanges. The NYSE criticized the definition for allowing Nasdaq to determine which transactions are effected on its exchange. While claiming its rule is neutral because it applies equally to all exchanges, NASD advises the NYSE in the ADF Amendment Release that its "comments are properly directed to the Commission in reference to Nasdaq's exchange registration and proposed rules."17
In each of these instances, NASD's ADF proposal bears on a key aspect of market structure, the trade-through rule under the ITS plan, rules governing locked and crossed markets and determination of what constitutes trading "on or through" a particular exchange. NASD has taken the position that even if its rules have consequences for the broader market structure, NASD is under no obligation to address those issues or does not have the authority to do so. We respectfully submit that the Commission consider the market-structure issues raised by the ADF, not piecemeal, but as part of a fully integrated consideration combined with sufficient time for fully informed public comment. The ADF should not be approved before those issues are thoroughly considered and resolved.
IV. COMMENTS REGARDING SPECIFIC AMENDMENTS TO ADF RULE PROPOSALS
We support NASD's decision to amend proposed Rule 6330 to make clear that ECNs are not required to post two-sided quotations in CQS securities they quote on the ADF. We also support the amendment to proposed Rule 6420(e) that makes voluntary the submission of three-party trade reports by registered ECNs. NASD has taken a positive step in amending its rule filing to require that market participants respond to an order from another market participant or customer broker-dealer within two seconds of receipt of the order. The amendment also would require that market participants have in place systems that can accomplish a round trip of an order from another market participant within three or fewer seconds, measured from the time an order is released by a market participant and until the time an execution notice is received by that participant.18
NASD says it believes that market participants, before locking or crossing the market, must first provide the other market participant the opportunity to trade the size displayed as well as the full amount of any reserve and/or move its quotation.19 We concur, but the rule should provide further guidance in the instance where the side receiving the order does not either fill it or move its quotation. As participants in the ADF may include ECNs, with their fully automated systems, the rule should provide clarity for programming purposes. It should stipulate that the sending party should be able to lock the market as long as it has transmitted an order for the full size of the quotation that would be locked and has not received a response within three seconds, which as noted above is the NASD's proposed uniform standard for market participants in connection with round-trip orders.
With respect to the short-sale rule, proposed Rule 5100, while NASD agrees with us that a consistent market-wide standard is desirable, it has decided to retain a short-sale rule based upon the national best bid and offer (the "NBBO"). We note that Nasdaq, as exclusive SIP for the UTP Plan, no longer provides an up/down arrow on its display of the NBBO. The ADF short-sale rule is triggered by a down bid of the NBBO. The proposed short-sale rule, however, cannot be implemented unless Nasdaq restores the up/down arrow to its NBBO display.
V. ADDITIONAL ISSUES THAT MUST BE ADDRESSED BEFORE THE ADF CAN BE APPROVED
In our letter of February 7, 2002, we pointed out to the Commission that the ADF must be tested before it is put in place. NASD has responded in the ADF Amendment Release that the ADF is being tested for compliance with the Commission's Automated Review Process and that once NASD completes its own testing protocols, the system will be ready to operate.20 NASD's statement is conclusory. To date, NASD has not published the technical specifications of the ADF system, nor has it published test data.21 The ADF is a quotation-display facility. Even assuming the display facility is fully and flawlessly operational upon launch, the same cannot be said for the execution facility. That facility will consist of bilateral linkages among ADF market participants. The technological challenges presented by an ADF will require the coordination of both a single display facility and the multiple interlinks required for the execution facility. By refusing to provide for a trial period for the ADF before launch, NASD is shifting the entire risk of the enterprise onto potential market participants. Since the identity of the proposed ADF participants is not yet publicly known, provision has yet to be made for wire connections and vendor data integration. These steps will have to occur before the ADF can be truly functional.
One very substantial additional question is whether, as currently designed and intended to be implemented, the ADF will in fact achieve visibility for the quotations entered there. Presumably, given its interests as a soon-to-be-public, for-profit corporation, Nasdaq would want the ADF to be a non-entity incapable of drawing order flow away from Nasdaq. It would want NASD just to go through the motions of appearing to put up a display facility. The ADF, as currently configured, appears consistent with those objectives.22 NASD has not done the work necessary to assure that the ADF quotations will be easily found by market participants looking for the best prices in Nasdaq stocks. This is a display facility that may well not be displayed anywhere since NASD has not seen to it as part of its mission that vendors will display the ADF data in a manner that is integrated with Nasdaq and is as easy to find as Nasdaq data. The ADF cannot be said to be complete and ready unless it appears on the screens displayed by established data vendors.
The Commission should reject the NASD's suggestion in the original ADF proposal that an exemption should be granted from Rule 11Ac1-2 (the "Vendor Display Rule") for the ADF. The NASD apparently has yet to seek that exemption, but it appears to us that the Commission, far from granting such a request, should instead expand the Vendor Display Rule to cover "Level II"-type information regarding the quotations and identities of quoting market participants. That would create a necessary level of transparency. Such a revision to the rule would be among the steps necessary to make the ADF a truly viable alternative to SuperMontage and at the same time to provide investors with the necessary market data from all market centers for making investment decisions in a decimalized environment. SuperMontage is introducing the ability to post and disseminate quotations at multiple price levels. The ADF apparently does not have any similar facility. If the Commission is to achieve its goal of fostering the development of a market structure that provides transparency and depth of liquidity, the Vendor Display Rule should be amended to require the ADF to provide a facility to aggregate, integrate and disseminate quotations at multiple price points.
We point out that the ADF Release does not disclose or address the fees that will be charged for the ADF. The Commission should not approve the ADF before the issues raised by NASD's ADF fee proposals are examined.23 In our letter to the Commission of April 2, 2002, we commented on NASD's fee proposal for the ADF. We questioned whether the proposed fee structure of the ADF would provide sufficient revenues to support the ADF since the proposed fee structure is not competitive with exchanges that provide market-data revenue shares. We noted that the fee structure Nasdaq has now put in place would favor market makers over order-entry firms and over ECNs and it would favor Nasdaq prints over ADF prints. The fee structure of the ADF should not be designed to recover the development costs of the ADF at the expense of the competitiveness of the ADF.
Since Nasdaq is effectively walking off into the sunset with the existing market infrastructure that was built over the course of thirty years by the NASD membership, the creation of a new infrastructure will not be a simple proposition. Our overriding concern is that the ADF not be designed to fail.
We note, finally, that the NASD has shown a propensity to bifurcate substantive rule filings from the filings pertaining to the related fees NASD will charge and not to file the fee rules until receiving Commission approval of the substantive filings. In that way, NASD takes advantage of the permission in the Exchange Act for NASD to file fee rules for immediate effectiveness in contexts where the fees are an important competitive element of a prior rule filing to which they relate.24 Hiding the ball in this fashion tends to deprive the Commission and the public of a meaningful opportunity to consider the issues as a whole, particularly since the Commission apparently has viewed its power to abrogate rule filings that became effective on filing as requiring the Commission not exercise that power unless it is convinced the rule filing, if abrogated and refiled, would have to be disapproved.
The burden the Commission thereby takes upon itself effectively shifts the burden of demonstration away from the NASD and onto the Commission and, indeed, public commenters and effectively creates a presumption that the rule filings are consistent with the Exchange Act. A proposed rule change that simply imposes or changes a fee, not in the context of a change in market structure, can perhaps be considered in isolation. In a context such as this however, where the level and structure of fees have important competitive and structural significance, the Commission should not allow the NASD to hold back information about fees when it is requesting Commission approval of the market facilities to which the fees relate. Particularly, moreover, if the Commission does not require the NASD to comply with the Commission's own Form 19b-4, and to ventilate the anticompetitive effects of NASD fees and other aspects of its rule filings, as has almost universally been the Commission's practice, the public, the Congress and others are put at a severe and illegal disadvantage in evaluating and commenting on NASD rule filings.25
As noted above, the ADF proposal holds the promise for an OTC market that will encourage competition and innovation, provided the Commission remains an active and vigilant participant in the process. For the reasons discussed above, however, the Commission does not have a legally sufficient basis, on the current record, to approve the instant rule filing.
This rule filing raises fundamental questions, questions as yet unanswered. The deliberative, informative process the Congress envisioned in its design of Section 19(b) of the Exchange Act has not been allowed to work in this instance. The Commission should insist the NASD remedy the problems outlined above in a further amendment to this filing before the Commission determines whether to approve it or to enter proceedings contemplating possible disapproval.
* * *
We appreciate the opportunity to make our views known to the Commission and the staff and we hope that our letter is helpful. If members of the Commission or of the staff believe we may be of further assistance in these matters, please let us know.
Very truly yours,
BLOOMBERG TRADEBOOK LLC
By: Kevin M. Foley by RDB
cc: The Hon. Harvey L. Pitt, Chairman
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Cynthia Glassman, Commissioner
Annette L. Nazareth, Esq., Director,
Division of Market Regulation
Robert L. D. Colby, Esq., Deputy Director,
Division of Market Regulation
Katherine A. England, Esq., Associate Director,
Division of Market Regulation
Elizabeth K. King, Esq., Associate Director,
Division of Market Regulation
John S. Polise, Esq., Senior Special Counsel
Mr. Stephen L. Williams, Economist
Mr. Mark Radke, Chief of Staff
Giovanni L. Prezioso, Esq., General Counsel
The Hon. Phil Gramm, Ranking Minority Member, Senate Committee on Banking, Housing, and Urban Affairs
The Hon. Paul S. Sarbanes, Chairman, Senate Committee on Banking, Housing, and Urban Affairs
The Hon. John LaFalce, Ranking Minority Member,
Financial Services Committee, U.S. House of Representatives
The Hon. Michael G. Oxley, Chairman, Financial Services Committee, U.S. House of Representatives
|1|| Bloomberg Tradebook operates a proprietary electronic communications network ("ECN") pursuant to Regulation ATS under the Securities Exchange Act of 1934 (the "Exchange Act") and a no-action letter from the staff of the Commission's Division of Market Regulation. Letter from Dr. Richard R. Lindsey to Roger D. Blanc (January 17, 1997), SEC No-Action Letter, 1997 SEC No-Act. LEXIS 55 (the "Bloomberg Tradebook No-Action Letter"). The Bloomberg Tradebook No-Action Letter was extended on several occasions. Bloomberg Tradebook is a registered broker-dealer and a member of NASD, Inc. Bloomberg Tradebook offers its institutional and broker-dealer customers, and other broker-dealers that access the Tradebook system via private connections and Nasdaq's SelectNet, the opportunity to buy and sell equity securities through use of the BLOOMBERG PROFESSIONAL service (as defined below).
Bloomberg Tradebook is a wholly owned subsidiary of Bloomberg L.P. ("Bloomberg"). Bloomberg is engaged in the business of providing its customers with financial market information, news and analytics via its worldwide electronic network (the "BLOOMBERG PROFESSIONALTM service"). Bloomberg also serves its broker-dealer and institutional customers' communications needs and facilitates their transaction of business by offering various additional services, including electronic messaging, non-anonymous offerings, bids wanted and equity order routing and indications of interest, and linkages to certain exchanges within and outside the United States. Approximately two million text messages and transaction messages involving billions of dollars of securities are sent and received by Bloomberg customers across the BLOOMBERG PROFESSIONAL service every business day. In addition, we expect in the future to provide access to additional points of liquidity as customer demand dictates.
|2||See letter of Bloomberg Tradebook to the Commission dated February 7, 2002 commenting on Securities Exchange Act Release No. 45156 (December 14, 2001) in Commission File No. SR-NASD-2001-90, available at http://www.sec.gov/rules/sro/nasd200190/foley1.htm.|
|3||See letter of Bloomberg Tradebook to the Commission dated April 2, 2002 commenting on Securities Exchange Act Release No. 45501 (March 4, 2002) in Commission File No. SR-NASD-2002-28, available at http://www.sec.gov/rules/sro/nasd200228/foley1.htm.|
|4||ADF Amendment Release, II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, "Amendments".|
|5||Securities Exchange Act Release No. 37538 (August 8, 1996).|
|6||ADF Amendment Release, II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, "Viability of ADF and Effect on Competition".|
|7||Id. at "Other Issues".|
|8||In re Global Marine Inc., Securities Exchange Act Release No. 11907 (December 5, 1975) in text preceding n.2.|
|9||See NASD Board of Governors at http.:222.nasd.com/corp_info/board_governors.asp and http://www.nasdaqnews.com/news/pr2002/ne_sectin02_112.html.|
|10||See Form 10, General Form for Registration of Securities Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, File No. 000-32651, filed with the Securities and Exchange Commission by The Nasdaq Stock Market, Inc., Amendment No. 2, June 29, 2001.|
|11||ADF Amendment Release, II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, "Viability of ADF and Effect on Competition".|
|12||Securities Exchange Act Release No. 43863 (January 19, 2001) in text following n. 463.|
|13||As exclusive securities information processor ("SIP") for the UTP Plan, Nasdaq has announced that it intends to carry the top of the ADF file for the period during which it continues to serve as SIP for the UTP Plan. (See Nasdaq Vendor Alert 2002-62 (May 31, 2002).) We note, however, that Nasdaq will display only the top of the ADF file, whereas the condition requires the inclusion of NASD quotations, that is, the entire ADF montage not just the top of file, in the Nasdaq quotation management system.|
|14||See letter to the Commission from Bloomberg Tradebook LLC (February 7, 2002), supra, note 2.|
|15||ADF Amendment Release, II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, n.l0.|
|16||Id. at "Locked and Crossed Markets".|
|17||Id. at "Trade Reporting".|
|18||Id. at "Amendments".|
|19||Id. at "Locked and Crossed Markets".|
|20||Id. at "Viability of ADF and Effect on Competition".|
|21||See id. "Submission of Real-Time Order Reports": "The NASD has developed specifications for submitting order report data that will be provided shortly to market participants." Those specifications have not yet been provided.|
|22|| In our comment letter last year on Nasdaq's registration, we noted:
The public trust that resides in the NASD and in its board to manage and improve the markets resides in a group of individuals many of whom have significant, personal financial stakes in the value of the Nasdaq shares they and their member firms hold. To whom would a young, enterprising employee of the NASD appeal with the idea of creating a third market that would be a vigorous competitor of the enterprise in which the senior officers and board members of the NASD were significant shareholders? The NASD, with the Commission's guidance, must provide an answer to that question [footnote omitted].
Letter from Bloomberg L.P. to the Commission (August 28, 2001) in text accompanying n.42, in Commission File No. 10-131, available at http://www.sec.gov/rules/other/10-131/foley1.htm. We think the NASD's failure to develop a viable ADF effectively answers this question, in a way that shows the Commission should look askance at the NASD's achievements in this regard.
|23||See Securities Exchange Act Release No. 45501 (March 4, 2002).|
|24||See, e.g., Securities Exchange Act Release No. 45906 (May 16, 2002) and letter from Bloomberg Tradebook to the Commission (June 5, 2002), in Commission File No. SR-NASD-2002-44.|
|25||See the Commission's Form 19b-4 under the Exchange Act, General Instructions, Item 4. The Congress intended the Section 19(b) procedures to provide a meaningful opportunity for public comment and serious Commission deliberation, free from any presumption that a rule filing is consistent with the Exchange Act. When a rule change would have a "significant policy implication," the Congress made it clear that the SEC was not to accede passively, but to issue "its own statement as to the regulatory need for and appropriateness of the self-regulatory rule change.". See Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 94-75, 94th Cong., 1st Sess. 30 (1975). That statement should be taken, we respectfully suggest, to indicate the Commission should be vigilant to ensure the notice-and-comment procedures built into Section 19(b) provide the Commission, the public and the Congress a meaningful opportunity to understand and comment on proposed rule changes. We respectfully suggest that the Commission should not allow self-regulatory organizations to manipulate the Section 19(b) procedures to present major market changes piecemeal with a view to frustrating meaningful public analysis and comment.|