DOMESTIC SECURITIES, INC.
October 24, 2003
Jonathan Katz, Esq.
Re: SR-NASD 2003-128
To the Commission:
Domestic Securities, Inc. is the owner and operator of the ATTAIN® ECN ("ATTAIN"), a participant on NASDAQ's SuperMontage System ("SuperMontage"). The National Association of Securities Dealers, Inc. ("NASD") has proposed to impose a cap of $.003 per share on fees charged by electronic communications networks ("ECNs") that post quotations on SuperMontage. Domestic is opposed to such a rate cap because that rate cap will have anti-competitive effects and NASDAQ and the NASD have presented no reasonable basis for permitting such an anti-competitive step. Domestic notes that at this time, ATTAIN is one of only three ECNs that post their subscribers' quotations on SuperMontage.
Domestic elected to post quotations on SuperMontage, which is in fact a super ECN and thus a competitor of ATTAIN, because of its order routing capability. However, NASDAQ's parent, the NASD, chose to develop its own quotation display, the Alternative Display Facility ("ADF"), without order routing capabilities. The Commission required the ADF to be operative prior to the effectiveness of SuperMontage. Domestic understands that the NASD determined that the ADF should not have an order routing component as part of the NASD's effort to curb any competitive pressures the ADF might bring to bear on its subsidiary NASDAQ's SuperMontage.
Competition between ECNs and NASDAQ increased after SuperMontage went into operation and today SuperMontage represents only approximately 16 percent of public trading in NASDAQ securities, despite the superior order routing capability of SuperMontage. Casting its lot with its traditional market maker customer base (which is opposed to ECN fees entirely), NASDAQ and the NASD have determined that no ECN posting quotations on SuperMontage can charge a rate for removing liquidity from SuperMontage that is greater than the rate charged by SuperMontage itself, or $.003 per share. Any ECN with a different business model (charging more to remove liquidity and paying more to attract that liquidity) must either change its business model to that of NASDAQ or leave SuperMontage and be without its vital order routing capabilities.
To be sure, such a fee cap by NASDAQ and the NASD will diminish competition to SuperMontage. As previously stated, Domestic believes that SuperMontage is the most advantageous venue for posting quotations of its subscribers due to SuperMontage's superior order routing feature. However, Domestic also understands that liquidity is fostered and encouraged through the payment of rebates to liquidity providers, which rebates provide a form of insurance for liquidity adders by diminishing loss on unprofitable trades and enhancing profitable trades as well as adding much needed liquidity to a marketplace that otherwise would currently be quite moribund. As one of the smaller ECNs, Domestic has chosen as its business model a policy of paying rebates higher than those of any other ECN. To support this model, it is necessary for Domestic to charge a fee high enough to support the rebate, pay the cost of operating ATTAIN, and produce a profit. Under NASD 2003-128, if approved, Domestic would be required to abandon its business model or abandon SuperMontage. If Domestic abandons its business model and remains on SuperMontage, it will be unable to compete with the SuperMontage ECN, given NASDAQ's vastly superior financial and other resources. If Domestic abandons SuperMontage, it will be left to the vagaries of vastly inferior and fragmented telecommunications and order routing facilities.
While the courts have determined that the NASD is not required to adopt the most pro-competitive proposal from among its choices, the courts have ruled that the NASD is required to demonstrate a reasonable basis for adopting a proposal with anti-competitive features. It is Domestic's position that the NASD and NASDAQ have failed to set forth a reasonable basis for the adoption of a proposal that clearly will negatively impact competition. The issue of "disparate" ECN fees which are allegedly confusing to SuperMontage participants, the sole premise on which NASDAQ and the NASD have grounded this fee cap proposal, is the reddest of herrings. There are only three ECNs on SuperMontage; the quotes of each are clearly marked so that the entire world knows that each charges an access fee. But, protest the ardent protesters, the public doesn't know what the fee is. The public can readily look on the internet for the fees of these three ECNs or will surely know the first time they are invoiced for a fee charged by any of the ECNs. More importantly, the public need not be concerned because, according to the Security Traders Association, what is wrong with ECN fees is that market makers cannot pass them on to their customers. That being the case, we are left with the proposition a reasonable basis for approving a fee cap of $.003 a share is that sophisticated market makers who get invoiced monthly by the same three ECNs do not know and cannot look up what those "disparate" fees are. Although the Commission has previously stated that an exchange or association may set limits on the fees of alternative trading systems, a reasonable person cannot reasonably believe that confusion on the part of sophisticated broker/dealers as to the "disparate" fees charged by three ECNs constitutes a reasonable basis for permitting NASDAQ and its parent, the NASD, to take the anti-competitive action of capping the fees of its ECN competitors at its own SuperMontage rate of $.003 per share.
Domestic does not believe that a fee cap is necessary or warranted, and nothing in the NASD's rule proposal has provided a reasonable basis for the adoption of a rule that will have anti-competitive effects. If the Commission disagrees with Domestic's position and believes that NASDAQ and the NASD have made out a valid case that the issue of three "disparate" rates provides a credible basis for taking an action that has an anti-competitive effect, Domestic respectfully requests that such fee cap be set at $.005 a share, a rate that will have a far less negative effect on competition and will not simply impose NASDAQ's self-chosen liquidity removal rate of $.003 a share on all of NASDAQ's ECN competitors that need to take advantage of the order routing capability of SuperMontage.
Very truly yours,