Michael T. Dorsey
Senior Vice President
General Counsel and Secretary
February 6, 2002
Via Electronic Mail and
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. SR-NASD-2001-90
Ladies and Gentlemen:
Knight Trading Group, Inc. ("Knight")1 welcomes this opportunity to provide the U.S. Securities and Exchange Commission (the "Commission" or the "SEC") with comments regarding the National Association of Securities Dealers, Inc.'s ("NASD") proposal to establish the NASD Alternative Display Facility ("ADF").2 We support the Securities Industry Association's ("SIA") comment letter on the Proposal filed with the SEC.3 Knight's comments are general in nature and meant to supplement the comments of the SIA. We welcome the opportunity to meet with SEC staff at a later date to discuss our comments in greater detail.
Knight supports the NASD's efforts to facilitate the separation of the Nasdaq from the NASD through the creation of the Commission mandated ADF. We applaud the NASD for acknowledging in the rules of the ADF that all market participants are permitted to charge fees for executions against quotes displayed in the ADF. Nevertheless, we have questions about several components of the Proposal, including potential problems with the trade reporting rules and the interaction of ADF quotes and the quotes of exchanges trading Nasdaq issues.
The Proposal Promotes Fair Competition and Permits All ADF Participants to Charge Quote Access Fees
Section 3(f) of the Securities Exchange Act of 1934 (the "Exchange Act") requires that the Commission consider whether the Proposal will promote fair competition, market efficiency, and the capital formation process.4 Knight believes the Proposal is a reasonable effort by the NASD to enhance the quality of the markets by providing more information to investors, promoting greater efficiency in executions, and increasing overall market transparency. While the ADF will provide a central means for displaying liquidity in Nasdaq stocks, it does not represent an exclusive means, nor does it prevent broker-dealers from seeking alternative order routing and execution services. Knight believes the Proposal will promote competition and capital formation by providing market participants with several quote and order management options outside of the Nasdaq's SuperMontage.
Moreover, we support the Proposal because it permits both brokers and dealers to levy post transaction fees against other market participants that interact with their quotes displayed on the ADF. This approach eliminates the inequitable distinction that has existed in the Nasdaq market between brokers and dealers since the Commission authorized brokers operating electronic communications networks ("ECNs") to levy post transaction fees against other market participants in footnote 272 of the adopting release of the SEC's Order Handling Rules. Knight commends the NASD for designing a regulatory structure that will level the playing field between broker-dealers and agency brokers that operate ECNs by permitting all parties to levy post transaction fees against parties interacting with their quotes. We believe this regulatory structure will begin to facilitate a resolution of the long-standing dispute between broker-dealers and agency brokers operating ECNs.
Cross Market Quotation Issues
While Knight supports the ADF, we are concerned with potential inter-market issues raised by the Proposal. Knight is concerned that under the ADF rules, the NASD would require "market participants to provide direct electronic access to other market participants and direct or indirect electronic access to all other NASD members seeking access."5 The NASD, however, has not set forth any criteria, such as minimum technological requirements, for determining whether the types of "direct electronic access"6 or "indirect electronic access"7 provided by ADF participants are suitable for NMS trading. Without some minimum technology specifications for ADF participants, inferior technology may disrupt the fair and orderly functioning of the national market system. We encourage the NASD to establish a program to monitor the technological capabilities of ADP participants and to remove the quotes of participants that routinely fail to update quotes in the same expeditious manner as the quotes displayed on other market centers.
Trade Reporting Issues: Rules 4630-4633 and Rule 6400 Series
Finally, Knight supports the ADF trade reporting rules that will permit NASD members to print trades to their destination of choice on a trade-by-trade basis. We however, are concerned the rules may require market participants to report all trades in Nasdaq issues to Nasdaq. Knight believes such a limitation would constitute an inappropriate extension of NASD's regulatory authority over our trading activity and would violate Section 11A of the Exchange Act. Nasdaq's separation from the NASD and the expansion of the Nasdaq Unlisted Trading Privileges Plan to new plan participants, we believe the ADF trade reporting rules must permit market participants to print trades on a trade by trade basis to any destination, including regional exchanges. Without this change, Knight believes the ADF trade reporting rules will unfairly deprive market markers of an equitable percentage of market data revenues distributed under the national market system plans.
In conclusion, Knight supports the NASD's proposal to amend its rules to reflect Nasdaq's separation from the NASD. We believe the ADF in concept will promote the goals of the Exchange Act and the Securities Acts Amendments. Knight does not believe the Exchange Act or the Securities Acts Amendments require the NASD to host an order execution system as part of the ADF. We applaud the NASD for beginning to address the long standing dispute between dealers and brokers operating ECNs over quote access fees by authorizing all market participants to charge such fees. Knight supports the NASD's efforts to recognize the right of market participants to print trades on a trade by trade basis to any number of print facilities. However, we are concerned that certain aspects of the ADF's trade reporting rules will unfairly discriminate between market participants and permit ECNs and UTP Exchanges to capture the bulk of the trade reporting volume and market data revenues. Knight believes it unnecessary to delay Nasdaq's exchange application pending the final deployment of the ADF as long as these issues are resolved prior to its launch.
We hope that the Commission and staff find these comments helpful. If Knight or I can be of further assistance to you on this matter, please do not hesitate to contact me at (201) 557-6910.
Michael T. Dorsey
cc: Hon. Harvey Pitt
Hon. Cynthia A. Glassman
Hon. Isaac C. Hunt
|1||Knight, headquartered in Jersey City, New Jersey, is the parent company of Knight Securities, L.P., Knight Capital Markets, Inc., Knight Financial Products, L.L.C., and Knight Securities International, Ltd. Knight and its affiliates, make markets in equity securities listed on Nasdaq, the OTC Bulletin Board, the New York Stock Exchange, American Stock Exchange, Nasdaq Europe, the London Stock Exchange and in options on individual equities, equity indices, fixed income instruments and certain commodities in the United States and Europe. Knight also maintains an asset management business for institutional investors and high net worth individuals through its Deephaven subsidiary. Knight's clients include the leading brokerage firms, and more than 1300 broker-dealers and 1000 institutional clients. Currently, the six-year-old company employs more than 1200 people worldwide.|
|2||Exchange Act Release No. 45156 (Dec. 14, 2001), 67 Fed. Reg. 388 (Jan. 3, 2002) (the "ADF Proposal" or the "Proposal").|
|3||See Letter from Stuart J. Kaswell, Senior Vice President and General Counsel, SIA, to Jonathan G. Katz, Secretary, SEC (Feb. 5, 2001).|
|4||15 U.S.C. 78c(f); see also S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975).|
|5||ADF Proposal, 67 Fed. Reg. at 451.|
|6||See Proposed NASD Rule 4300(d)(2).|
|7||See Proposed NASD Rule 4300(d)(3).|