April 2, 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-2002-28
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. 45501 (March 4, 2002) (the "ADF Fees Release") on a proposed rule change filed with the Commission by the National Association of Securities Dealers, Inc. (the "NASD") setting forth a schedule of fees for use of the NASD's proposed Alternative Display Facility (the "ADF") and related services.
As we stated in our letter to the Commission of February 7, 2002 commenting on the ADF proposal in Securities Exchange Act Release No. 45156 (December 14, 2001), Bloomberg Tradebook fully supports the establishment of the ADF and considers the NASD's proposal for the ADF fundamentally sound. We called the Commission's attention, however, to issues raised by the NASD's proposal the resolution of which we considered essential not only to the Commission's evaluation of the ADF but also to the ultimate commercial success or failure of the ADF. The fee structure the NASD has proposed for the ADF raises additional concerns we believe the Commission must address before approving the ADF.
The ADF should of course be self-supporting. It is expected that market data fees will be a main source of revenue. We question, however, whether the proposed fees will provide sufficient revenues since we think the ADF fee structure is not competitive with the alternatives offered by Nasdaq and by the Cincinnati Stock Exchange. The fee structures offered by those market venues provide for a sharing of market-data revenues with participating members but the ADF would not. That disparity in incentive would likely diminish drastically the attractiveness of the ADF as a place to which to report OTC trades in Nasdaq-listed securities.
The ADF fee structure would favor market makers over order-entry firms. Also, in conjunction with the SuperMontage rules, the ADF fee structure would favor market makers over ECNs and would favor Nasdaq prints over ADF prints. The effect of these rules would be to further reduce the attractiveness, and therefore in all likelihood the volume, of trades directed to the ADF rather than to Nasdaq.
Those disparities, and the problems they would present for the ADF are evidence of an underlying problem, that the NASD has not thought through the commercial implications for itself of its own proposed fee structure. The NASD has adopted without modification Nasdaq's rules for determining how market participants will receive credit for their executed trades, which favor Nasdaq over the ADF. The NASD should instead have designed its rules with a view to favoring itself, maximizing its own market data revenues. Apparently, the NASD did not do the work to determine how to achieve that objective. That fact reinforces the notion that, for whatever reason, the NASD is not sufficiently committed to making the ADF successful.
These matters raise once again an issue we called to the Commission's attention in our letter of February 7, 2002, namely, the residual ties between the NASD and Nasdaq, in particular, the NASD's interest in the commercial success of its former affiliate once it becomes a for-profit stock exchange. The NASD states in the ADF Fees Release that the proposed fee structure for the ADF "is a reasonable means for the NASD to recover the development costs of the ADF, as well as meet ongoing operating costs." As we noted, however, in our comment to the NASD dated March 8, 2002 on its proposed expansion of the scope of transactions subject to Section 8 fees, the proposed Section 8 fees are nothing less than a subsidy by NASD members of the cost of regulation of the Nasdaq stock exchange. We argued in that letter that since, in becoming a for-profit exchange, Nasdaq is taking with it valuable facilities and a major portion of the NASD's revenue base, the NASD should seek payment from Nasdaq, not from the NASD's own members. We believe the same analysis applies to the NASD's underlying rationale for the proposed ADF fee structure. The NASD should not use the fee structure of the ADF to recover development costs of the ADF at the expense of the competitiveness of the ADF. The fee structure of the ADF should be set to make the ADF both profitable and competitive. The proper source for recovering development costs is Nasdaq itself.
As we have noted before, the NASD's residual proprietary interest in Nasdaq gives the NASD a continuing stake in the commercial success of Nasdaq. The NASD recently entered into a transaction with Nasdaq in which Nasdaq agreed to repurchase a portion of the NASD's ownership interest in Nasdaq for consideration of approximately $440 million and preferred stock in the Nasdaq stock market. In addition, the NASD retains warrants on common stock of the Nasdaq stock market. Taken together, the NASD's residual interest in Nasdaq, as well as its desire to recoup its investment in the ADF within such a short time, suggest that the NASD is not sufficiently committed to the success of the ADF and is not sufficiently independent of Nasdaq to establish the ADF as a viable and competitive alternative to the Nasdaq stock market. Bloomberg Tradebook strongly urges the Commission to work closely with the staff of the NASD to ensure that the ADF is structured to meet rather than to undermine its development as a robust and competitive alternative to the proposed Nasdaq stock exchange.
Notwithstanding all these issues, we wish to reiterate our strong support in general for the ADF proposal, assuming the problems we have continued to point out can be satisfactorily addressed. We continue to believe that, in the main, the staff of the NASD have presented a simple and effective solution for meeting the NASD's obligation to provide an OTC market to replace Nasdaq. We believe, however, that a competitive fee structure is an essential component of realizing the potential of the ADF proposal. In addition to addressing the issues we raised in our letter of February 7, 2002, we urge the Commission to request that the NASD revise its proposed fee structure to provide fees for reporting market data that will provide incentives to market participants to report their trades on the ADF without resorting to payment for order flow. With competitive fees, we are convinced the ADF will be able to provide an effective alternative to the Nasdaq stock exchange and other exchanges.
In calling upon the NASD to develop the ADF and in making an operational ADF a condition to the Commission's approval of Nasdaq' registration as an exchange and the commencement of SuperMontage, we believe the Commission called for the creation of an alternative marketplace that would attract trading interest, not deter it. An ADF that pays lip service to the Commission's requirement while creating a system that is compromised in its foundation and designed to fail should not be approved. In light of the NASD's conflicting interests, we urge the Commission to work more closely in the development of the ADF. We particularly urge the Commission to consider the proposed ADF, not piecemeal, one release at a time, but taken together, as a whole, to assess the merit of the overall proposal and the reasonable likelihood that it offers a viable facility for a robust OTC market.
We understand that the Commission may be planning to approve Nasdaq's application for registration as a national securities exchange before all these issues are sorted out, with the proviso that the registration will not take effect until the Commission is satisfied that the ADF is operational. We understand that this program is designed to permit Nasdaq to commence and conclude its public offering in advance of the effectiveness of its registration. We find that possibility troubling, not only because there remain serious questions as to the viability of the ADF under the current programs but also because we do not think there is a reasonable likelihood the Commission will be able to make the requisite legal findings for approval of Nasdaq's registration, particularly the absence of inappropriate burdens on competition, the fairness and reasonableness of its fees and the effects of the remaining links between the NASD and Nasdaq.
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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
Belinda Blaine, 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
David M. Becker, Esq., General Counsel
|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, most recently on June 14, 2001. Bloomberg Tradebook is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. (the "NASD"). 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.