HILL, THOMPSON, MAGID, L.P.
15 Exchange Place
Jersey City, NJ 07302-3912
Executive Offices: 201-434-6900
November 7, 2003
Johnathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. SR-NASD-2003-128
Dear Mr. Katz:
Hill Thompson Magid, LP ("Hill Thompson") is submitting its comments to the Securities and Exchange Commission (the "Commission") in response to the proposal by the Nasdaq Stock Market, Inc. ("Nasdaq") to establish a maximum fee that electronic communications networks ("ECNs") may charge market participants for accessing the ECN's bid or offer through SuperMontage and eliminate certain SuperMontage execution algorithms. The proposal would prohibit ECNs that charge access fees of higher than $.003 per share from participating in SuperMontage and eliminate execution algorithms that permitted market participants to disfavor ECNs that charged access fees.
Hill Thompson believes that all access fees not incorporated into the displayed quote should be prohibited within Nasdaq. Notwithstanding this position, Hill Thompson commends Nasdaq's proposal as a meaningful step forward in the effort to eliminate a discriminatory access-fee regime. Hill Thompson urges Commission approval of the proposed rule changes as a temporary measure pending a final resolution of the access-fee issue in a manner that does not discriminate against market participants on the basis of their business model.
Currently, the no-action letters under which ECNs operate authorize those ECNs to charge a fee of up to $.009 (9 mils) per share, down from over 15 mils per share at the time the order handling rules were adopted. The Commission, however, has consistently interpreted rule 11Ac1-1 of the Securities Exchange Act of 1934 to prohibit market makers from similarly charging an access fee not incorporated into their public quotation. Most of the major ECNs charge between 2.7 mils and 3 mils for removing liquidity from their system, but certain opportunistic ECNs charge the maximum possible rate and are able to attract order flow to their system only by rebating a potion of any access fees received. Nasdaq's rule proposal would amend Nasdaq rules 4263 and 4710 to establish a maximum access fee of 3 mils for ECNs that display in SuperMontage, while eliminating the price/time execution algorithm that takes such access fees into consideration.
Access Fees Within the Nasdaq System
Access fees charged by participants displaying quotes in Nasdaq's SuperMontage are not comparable to ECN access fees charged by market participants displaying in other venues. Every market - including Nasdaq - charges some form of fee to cover the cost of operating its marketplace and Hill Thompson does not believe either the fees or the imposition of reasonable limits on such fees violate the Exchange Act. What sets apart ECNs that participate in Nasdaq however, is that Nasdaq already assesses that fee and pays for the infrastructure that links the participants within its marketplace. The quotations of an ECN that displays in Nasdaq consumes Nasdaq's bandwidth and is subject to the regulatory oversight that Nadsaq provides. Nadsaq market makers that access an ECN quote displayed in Nasdaq do so over a Nasdaq system for which it has already paid. This is in stark contrast to an ECN that displays in the alternative display facility ("ADF") or which is a facility of a competing exchange. ECNs or exchanges outside of Nasdaq pay for their own market infrastructure and any market participant that accesses such ECN or exchange should expect to pay fees no less than the subscriber or member of such ECN or exchange - just as that ECN must pay such fees to Nasdaq when accessing quotes displayed in Nasdaq via SuperMontage. While Nasdaq does assess a lower SuperMontage fee on orders that trigger an ECN access fee, due to the over-lapping marketplace fees a Nasdaq market maker would actually incur lower fees by taking the same-priced quote on another market rather than one displayed by an ECN in the market maker's own marketplace.
Exchange Act section 15(b)(5) requires securities associations to provide for the equitable allocation of reasonable dues, fees and other charges among members. Permitting certain SuperMontage participants to impose an additional access fee for providing the same liquidity that market makers on SuperMontage are required to provide without the benefit of such a fee is discriminatory and violates section 15(b). The principal distinguishing characteristic of ECNs and market makers is their business model. Both participants maintain expensive systems that enable them to display and execute orders, report transactions and comply with the limit-order display requirements. Both rely on Nasdaq, not privately maintained linkages, in connection with the transactions at issue. Hill Thompson sees no justification for the disparate treatment of access fees within Nasdaq.
The imposition of such fees by ECNs displaying in Nasdaq is particularly troubling post-SuperMontage because SuperMontage participants cannot unilaterally determine not to access the quote of an ECN that displays in Nasdaq. Hill Thompson can exercise discretion, consistent with its best-execution obligations, over its decision to access the quote of an ECN that displays in the ADF or the quote of a competing exchange, but Nasdaq's SuperMontage execution algorithms take that decision out of the hands of Hill Thompson for orders executed by SuperMontage. That the current maximum level of the fee is so unreasonable that it actually induces transactions and quote-locking designed to earn rebates adds injury to insult and is the main reason why Hill Thompson supports the proposal as a first-step to elimination of all access fees within Nasdaq.
Hill Thompson appreciates the opportunity to comment on this proposal and encourages the Commission to approve the proposed rule change.
Hill, Thompson, Magid, L.P.
|| The Hon. William Donaldson, Chairman
|| The Hon. Cynthia Glassman, Commissioner
The Hon. Paul Atkins, Commissioner
The Hon. Roel Campos, Commissioner
The Hon. Harvey Goldschmid, Commissioner
Giovanni Prezioso, General Counsel
Annette Nazareth, Director, Division of Market Regulation
Robert L.D. Colby, Deputy Director, Division of Market Regulation
John Polise, Senior Special Counsel, Division of Market Regulation