April 20, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Mr. Jonathan G. Katz, Secretary
Re: Amendment No. 4 to SEC File No. SR-NASD-99-53
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. 42573 (March 23, 2000) (the "Release"), on the Nasdaq Order Display Facility and Modifications of the Nasdaq Trading Platform (referred to below as the "Amended SuperMontage Proposal"), submitted by the National Association of Securities Dealers, Inc. (the "NASD"), through its wholly owned subsidiary, The Nasdaq Stock Market, Inc. ("Nasdaq").2 In addition to Bloomberg Tradebook's comments in this letter, we refer the Commission to Bloomberg's letter to the Commission dated January 11, 2000 (the "January 2000 Letter") with respect to the Initial Proposal, Bloomberg's letter to the Commission dated June 4, 1999 (the "June 1999 Letter") with respect to Nasdaq's NNMS proposal set forth in Securities Exchange Act Release No. 41296 (April 15, 1999) (SR-NASD-99-11) and Nasdaq's proposed Integrated Order Delivery and Execution System proposal set forth in Securities Exchange Act Release No. 39718 (March 4, 1998) (SR-NASD-98-17) (the Integrated Order Delivery and Execution System and Central Limit Order Book proposal hereinafter called the "CLOB proposal"), and Bloomberg's letter to the Commission dated May 12, 1998 relating to the "Next Nasdaq System" (the "May 1998 Letter").
Nasdaq's Amended SuperMontage Proposal offers some improvement from the Initial Proposal in that UTP exchanges would no longer be last in the queue to receive orders. Bloomberg commented on this problem in its earlier letter because we believe free competition between and among exchanges benefits the marketplace, investors and market participants.
The Amended SuperMontage Proposal does not go far enough in that respect, however, because UTP exchanges would still stand behind market makers in the order queue. That discrimination is neither necessary nor appropriate in furtherance of the purposes of the Exchange Act.
More fundamentally, the Amended SuperMontage Proposal remains flawed at its core. It would centralize and enshrine as a permanent monopoly what otherwise could be carried out more efficiently and more reliably by a competitive model. This serious flaw has not been addressed in the Amended SuperMontage Proposal. If the Amended SuperMontage Proposal were ever approved, it would force centralization of message traffic and embed Nasdaq's own monopoly as the technology provider to the market in securities quoted on Nasdaq. This is equivalent in concept and design to a Rule 390 for the entire Nasdaq market, without any exceptions for trades taken to other markets. It would effectively overrule the Commission's longstanding conclusion that such exclusionary measures are against public policy.3
This is clearly part of the for-profit picture Nasdaq envisions for itself. In its recent private placement memorandum/proxy statement distributed to NASD members asking members to vote to make Nasdaq a private, for-profit entity, the NASD cites the SuperMontage as its most prominent business plan for Nasdaq and warns quite candidly that the threat to Nasdaq's monopoly position is one of the most significant risk factors:
SelectNet is Nasdaq's automated market service that enables securities firms to route orders, negotiate terms, and execute trades in Nasdaq securities. If pairs of market makers or ECNs determine that they do enough order routing traffic in a day so as to justify setting up an alternative proprietary network for their traffic, Nasdaq may be forced to reduce its fees or risk losing its share of the order routing business. A reduction in the order routing business could have an adverse effect on Nasdaq's business, financial condition and operating results.4
The linchpin of Nasdaq's monopolistic designs is the forced centralization of electronic messaging. This centralization harms the marketplace because it creates a central point of failure and eliminates innovation. It is designed to extract monopoly profits from market participants for the benefit of the Nasdaq shareholders. By forcing market makers and others to accept executions rather than orders, Nasdaq seeks to prevent its members from establishing private wire connections that would bypass the Nasdaq message toll road, which, in the passage quoted above, it acknowledges as a threat to its monopoly profits.
The coerced centralization of the Amended SuperMontage Proposal would occur in two ways. First, Nasdaq proposes to display the depth of market by taking additional orders, but Nasdaq then removes the market participant's name from such orders and replaces it with Nasdaq's own name. This serves Nasdaq's purposes in blocking competition. By denying to order-entry firms the ability to know the identity of the firms whose quotations are displayed, the SuperMontage would deprive the order-entry firms of the option of bypassing the Nasdaq monopoly toll road and going directly to the sources of the quotations.5
Second, Nasdaq would enforce the primacy of an execution message over an order message. Nasdaq would require market makers to receive execution messages even though order messages would adequately serve the market's needs with no significant time delays: market makers that failed to respond within a fraction of a second could have the orders turned into executions. This would promote the use of automated execution facilities among market professionals and that would in turn enhance market efficiency.
ECNs and UTP exchanges opting to receive order messages under the Amended SuperMontage Proposal would incur substantial economic penalties. As we have pointed out before, this heavy-handed approach by the NASD is by no means necessary or useful to the markets. Order messages need not be converted into execution messages that are assigned to liquidity centers-be they exchanges, ECNs or market makers-to have a fully functional, error-resistant, sensibly designed national market system. Given the currently available technology and the costs of telecommunications, which have declined sharply in recent years, it is both feasible and desirable to have a system that depends on rapid-fire, seriatim interrogation of various liquidity pools rather than an assignment of executions to liquidity centers. Given the speed at which the markets move today, any given liquidity center may have already satisfied its capacity or appetite to transact at a given price. Put simply, the execution assignment system proposed by the NASD would promote the business objectives of Nasdaq by protecting Nasdaq from competition, but it would disadvantage market makers, exchanges and ECNs without advancing any legitimate objective of a national market system.
Nasdaq's management once faced criticism for their repeated proposals to relieve NASD members of the burden of SOES without proposing a suitable alternative. Now, the current management is affirmatively putting forward the forced-execution aspect of SOES even though other models not involving the assignment of execution messages now exist and have been proven to work. Perhaps current management perceives forced executions as the ideal monopoly solution. As proposed, the Nasdaq SuperMontage would burden the market by being a single point of failure when the Nasdaq technology breaks down and would inhibit innovation by Nasdaq participants in the routing of orders. Other market models that have been shown to work do not present these problems. These drawbacks and comparative disadvantages of the Nasdaq SuperMontage are nowhere discussed or justified in the Amended SuperMontage Proposal.
The Amended SuperMontage Proposal continues to be inconsistent with Sections 15A(b)(6) and 15A(b)(9) of the Exchange Act since (i) it creates impediments to a free and open market and a national market system, (ii) it discriminates unfairly between broker-dealers that are market makers and those that are ECNs and (iii) it imposes burdens on competition that are not necessary or appropriate in furtherance of the purposes of the Exchange Act. We respectfully submit, therefore, that the Commission cannot lawfully approve the Amended SuperMontage Proposal.
The Commission should reject the Amended SuperMontage Proposal because it does not offer any additional benefits and would tend to extinguish innovation and deny the Nasdaq market the benefits of competition, all to the detriment of investors and the marketplace. By their very nature, central execution utilities create bottlenecks and stifle innovation. If it were put into effect, the Amended SuperMontage Proposal would exacerbate the existing Nasdaq bottleneck, would directly harm market participants and would impose competitive burdens that do not serve real market needs and do not further the purposes of the Exchange Act.
We request that the Commission urge the NASD to amend its filing to incorporate the alterations we recommend above. We believe that the proliferating multiple-path, point-to-point, order-delivery systems that exist today offer the best solution to the market's needs in a naturally competitive environment: innovative trading tools that electronically work orders quickly and discretely across multiple sources of liquidity, with minimal market risk and impact.
* * *
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
|cc:|| The Hon. Arthur Levitt, Chairman
The Hon. Norman S. Johnson, Commissioner
The Hon. Isaac C. Hunt, Jr., Commissioner
The Hon. Paul R. Carey, Commissioner
The Hon. Laura S. Unger, Commissioner
Annette L. Nazareth, Esq., Director,
Robert L. D. Colby, Esq., Deputy Director,
Belinda Blaine, Esq., Associate Director,
David M. Becker, Esq., General Counsel
Mr. Richard G. Ketchum
|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. (See 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 March 3, 2000. 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.
|2||The Release publishes Amendment No. 4 to a proposed rule change first proposed with Amendments Nos. 1 and 2, published in Securities Exchange Act Release No. 42166 (November 22, 1999) (the "Initial Proposal"). On March 16, 2000, Nasdaq filed Amendment No. 3 to the Initial Proposal. The Amended SuperMontage Proposal would create a Nasdaq Order Display Facility and would modify the Nasdaq's Small Order Execution System ("SOES") and SelectNet Service ("SelectNet") trading platforms.|
|3||It was just such an effort on the part of the New York Stock Exchange (the "NYSE") to centralize order flow on its floor that led the Commission in 1941 in the Multiple Trading Case to bar the NYSE from prohibiting its members from trading NYSE-listed securities on other national securities exchanges. Matter of The Rules of the New York Stock Exchange, 10 SEC 270 (October 4, 1941) (NYSE rule prohibiting dealings on other markets declared to be against public interest and illegal).|
|4||The Nasdaq Stock Market, Inc., Private Placement Memorandum (March 10, 2000) at A-20, attached to National Association of Securities Dealers, Inc., Notice of Special Meeting of Members to be Held on April 14, 2000 (the "Nasdaq Private Placement Memorandum").|
|5|| The NASD in the Private Placement Memorandum in fact cites this effect as part of its plan:
[B]ecause the Nasdaq Order Display Facility provides for pre-trade anonymity, it is intended to encourage market participants to route orders through the Nasdaq market execution system because no one will know the identity of the firm displaying the order . . . .
Id. at A-43.