Mount Pleasant Brokerage Services

Suite 200, 389 Johnnie Dodds Blvd.

Mt. Pleasant, SC 29451

June 1, 1999

Mr. Jonathan Katz

Secretary

Securities and Exchange Commission

450 Fifth Street, NW

Washington, DC 20549

via email: rule-comments@sec.gov

 

Re: File No. SR-NASD-99-16

Dear Mr. Secretary:

Mount Pleasant Brokerage Services ("MPBS"), LP appreciates this opportunity to comment on SR-NASD-99-16, otherwise known as the Agency Quote Fee Proposal. As a NASD member and one of the most active NASDAQ order entry firms, MPBS has several concerns regarding this proposal.

We wish to reiterate our vigorous opposition to SR-NASD-99-16 as originally stated in our comment letter of March 31st on SR-NASD-99-09, otherwise known as the Agency Quote Proposal (please see the attached letter which we wish to incorporate by reference.) The Agency Quote Fee Proposal is really an extension of SR-NASD-99-09, so our concerns are relateded to those regarding SR-NASD-99-16.

The Agency Quote Fee Proposal again argues that market makers have lost control of their quotes due to the fact that they must now display agency orders in their quotes under the Order Handling Rules. This argument is invalid. If such a problem existed, market makers would send all their agency orders to ECNs and in many cases would be paid for doing so (e.g. Island, BRUT, and NTRD pay for limit orders that execute on their books.)

The Agency Quote Fee Proposal argues that it is "inequitable that ECNs are allowed to charge a fee when their quote is accessed, but market makers are prohibited from charging a fee when they act as agent." If this proposal is accepted, it would also be inequitable to deny order entry firms the same ability to post and charge for their agency orders. Therefore, if this proposal is accepted, we encourage the SEC to allow all NASD members to have agency quotes and to be able to charge the same fees as market makers.

The Agency Quote Fee Proposal specifically states that it will be acceptable for market makers to charge different participants different prices. Functionally this will allow market makers to charge at least ½ cent per share to participants they would rather not permit their customers to execute against. At the same time market makers will have legal justification to negotiate deals with one another to negate transaction costs between one another. It is not clear that the market makers’ customers have the same list of favored and dis-favored firms, but the customers have no say in the matter. More fundamentally, it is very harmful to the concept of a marketplace to create a mechanism that encourages different prices for the same product sold at the same time in the same place.

The Agency Quote Fee Proposal in conjunction with SR-NASD-99-11, otherswise know as the SOES/SelectNet Proposal, has unintended negative consequences. In today’s environment, when a trader executes an order through SelectNet, he or she can decide where to execute when multiple alternatives exist. The trader will most often choose the least expensive means of execution. If the "Agency Quote Proposal" is adopted and market makers are allowed to charge for their quotes, there will be no means of choosing the least expensive provider of liquidity since the SOES system will automatically choose which market maker the trade executes against. This will take away the main reason to be competitive which is mainly to attract orders. If every order is executed on a time-priority (first market maker in gets the execution), then it will be to the market makers advantage to charge as much as possible. Why would anyone want to be the least expensive means of execution? Since executions will happen automatically, there will be no reason to compete through pricing. All firms will charge at least ½ a cent per share. There will be no reason to be the least expensive provider. In fact a firm that doesn’t charge at least ½ a cent per share will be at a competitive disadvantage.

The Agency Quote Fee Proposal would require ECNs and market makers to round orders away from the market if the fees they charge are in excess of ½ cent per share. In the case of ECNs, we don’t believe that ECN participants should be harmed because of what they charge. ECNs compete for orders both in their pricing and in their technology. When charges are set by regulation, the customers of these ECNs are the real losers as their execution quality deminishes due to inferior order pricing. Competition should determine what charges are acceptable, not regulation.

We believe that forcing market makers to round away from the market may actually induce them to charge a higher fee. If a market maker is allowed to price a customer order away from the market, he is in effect given an option to execute the order from his proprietary account when the market begins to move towards that price. This will most likely be advantageous to the market maker and of course adverse to the customer. In effect, it allows a perfect (and of course legal) mechanism to avoid the Order Handling Rules.

CONCLUSION

We recommend that the SEC reject both SR-NASD-99-09 and SR-NASD-99-16. They are dangerous and poorly considered with dubious objectives. The ramifications of these proposals undo much of the good that has been achieved in the past two years.

Thank you very much for your careful consideration.

Sincerely,

Attachment: April 1, 1999 Comment letter on SR-NASD-99-09

March 31, 1999

Mr. Jonathan Katz

Secretary

Securities and Exchange Commission

450 Fifth Street, NW

Washington, DC 20549

Re: File No. SR-NASD-99-09

Dear Mr. Secretary:

Mount Pleasant Brokerage Services ("MPBS"), LP appreciates this opportunity to comment on the NASD’s "Agency Quote Proposal" (AQ) as applied for by SR-NASD-99-09. As a NASD member and one of the most active NASDAQ Order Entry firms, MPBS has several concerns with this proposal.

At first glance, the AQ Proposal appears to be somewhat innocuous. Under these changes, market makers will be able to quote agency orders via a separate MMID, and in the future they will probably be allowed to charge firms for executing against such orders. According to the NASD, these rule changes are in response to market makers "losing control" of their quotes due to the Order Handling Rules.

The reality of the situation is that no such "losing control" problem exists. If market makers had such problems, they would be able to send their agency orders to one of the ECNs. Several ECNs now pay for such orders (i.e. Island, BRUT, and Next Trade.) Not only would this solve the alleged problem, market makers would be paid to route these orders to the ECNs! Nearly every Order Entry Firm has gained direct access to one or more of the ECNs. Even the smallest of Order Entry firms has the technological capability to link to at least one ECN. The market makers making these complaints either must not care or have other goals in mind.

MPBS has two issues with the AQ Proposal. First, only market makers are allowed to place agency orders via this method. Order Entry Firms make up a majority of the NASD’s constituency, but as in the past, the NASD continues to represent the viewpoint of the market maker minority. If the AQ Proposal is to be enacted, we believe that all firms should be allowed to place orders for their customers in this manner. If all NASD members are forced to pay for this system, then all members should be allowed to participate. In the market as it exists today, only market makers are allowed to execute against SOES orders. If all NASD members could place agency quotes, then this would actually remove one of the inequities of today’s NASDAQ system.

The second and more serious issue we have with this proposal are the charges that the market makers will inevitably make. Even in today’s environment, there exist inequities in how ECNs charge their subscribers vs. non-subscribers. ECNs are allowed to negotiate deals with one another while outside firms pay top-dollar prices to execute against them. This problem isn’t terribly noticeable in today’s environment, mainly due to competition. However, the Agency Quote Proposal will cause the worst type of anti-competitive pressure. Market making firms that process business between firms will negotiate deals with one another. Those firms not involved will be forced to pay as much as can legally be charged. Market makers will have no competitive reason to charge lower fees. In general, market makers would rather internalize these orders, as opposed to ECNs which only get paid when an execution occurs. Market makers would clearly want to penalize those who would take these orders away from their own books (and in effect penalize their customer’s orders in the end result.) Clearly, this is a dangerous problem. I hope the Commission will seriously consider the ramifications of such a change in market structure.

Another problem associated with these charges occurs if SR-NASD-99-11 is approved whereby it is likely SOES will become the main trading vehicle of the NASDAQ market. In today’s market a trader has a choice as to where to place an order via SelectNet. Under SR-NASD-99-11, the SOES system will choose against whom a trade will execute without regard to cost. A trader entering a market order will have no idea how much he/she will be charged until after the fact.

CONCLUSION

The truth is that the Agency Quoting Proposal is an ECN killer. It will also have a severe negative effect on many Order Entry firms, and as such could easily cause a serious change in market structure. Market makers could very well end up with much less competition, and we could find ourselves in an environment much like that which existed before the Order Handling Rules. In recent years, competition is what has made the NASDAQ market successful; it must not be diminished.

Our recommendation is to reject SR-NASD-99-09. It serves no purpose, and it has far too many negative ramifications. If SR-NASD-99-09 is approved, we hope you consider letting all NASD members have access. Further we would recommend against allowing firms to have the ability to charge for executing such orders because of the devastating effect this would have on the NASD marketplace.

 

Thank you very much for your careful consideration.

 

Sincerely,

Steve Swanson

President of Mt. Pleasant Brokerage Services, LP