September 22, 2000
VIA FACSIMILE & FIRST CLASS MAIL
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: SR-NASD-99-53; Release No. 34-43133
Dear Mr. Katz:
T. Rowe Price Associates, Inc. ("TRPA") welcomes the opportunity to comment on the Nasdaq Stock Market's ("Nasdaq") proposal to establish an order display and trading facility, referred to as SuperMontage. TRPA, together with its affiliates, manages approximately $179 billion in total assets. This includes more than $115 billion in the portfolios of more than 80 open-end registered investment companies that are part of the TRPA complex. Additionally, T. Rowe Price Investment Services, Inc., a registered broker-dealer subsidiary of TRPA, offers brokerage services, with over 100,000 client accounts.
Unlike many other market participants that have been framing the issues surrounding Nasdaq's proposal, TRPA has no pecuniary interest in the ultimate outcome of the SuperMontage debate. TRPA is not affiliated with any ECN or market making firm. TRPA's only interest is ensuring a fair and efficient marketplace within which TRPA's obligations to its clients can be satisfied. TRPA has always taken a keen interest in market structure issues and how such issues may impact its ability to provide the highest level of service to its clients. With this interest in mind, TRPA is supportive of efforts to facilitate order interaction and create unified trading platforms. Although TRPA believes SuperMontage furthers these goals, TRPA has some serious concerns with the proposal as currently drafted.
TRPA has long believed that competition and the creation of new trading technologies act to benefit the markets. Innovation promotes healthy and vibrant market opportunities. However, a negative byproduct of the addition of new trading venues has been the increase in market fragmentation. This new environment, with multiple and diverse trading platforms, has made it increasingly difficult to satisfy the obligation of best execution. TRPA believes it is imperative to encourage the creation of unified markets where orders are able to interact in centralized locations. These structural enhancements will act to increase transparency and execution quality.
TRPA believes that the SuperMontage concept furthers the goals of unifying the markets and providing a means for orders to interact with one another, while allowing for continuing innovation. However, TRPA has two specific concerns regarding the Nasdaq proposal: (i) representation of access fees in the National Best Bid and Offer ("NBBO"); and (ii) the manner in which price and time priority is adjusted after an order is modified.
TRPA believes that the NBBO should represent the price that one pays to buy or that one receives to sell a particular security. The SEC's decision, as a result of the adoption of the Order Handling Rules, to permit ECNs to charge for access to their systems without a corresponding right for market makers to similarly charge, has complicated this simple premise and created an uneven playing field. Nasdaq's SuperMontage attempts to address the issue by placing ECNs last in the priority que regardless of order receipt time. This procedure is based on the premise that an ECN order is inferior to an identically priced market maker order due to access fees. TRPA does not believe that this approach adequately addresses the issue.
As noted above, TRPA is against diluting the NBBO with fees. Instead, TRPA believes that if access fees will continue to be permitted, they should only be charged on one side of a transaction. In other words, the NBBO should remain pure so the entity accessing the NBBO would receive an execution at the stated price. Any fees should be absorbed by the entity that placed the order that set the NBBO. That order can then be treated as equal to any other order with respect to SuperMontage prioritization.
TRPA is aware of a contrary view that entities providing liquidity to the market should not be subject to access fees. However, TRPA believes that such entities have the ultimate choice as to where to route their orders and the knowledge of whether such destinations charge access fees. TRPA notes that in today's environment, market participants determine for themselves which destinations charge access fees and whether such fees should be taken into account when making order routing decisions. TRPA sees no reason why SuperMontage should be programmed to place those entities charging access fees to the end of the line if those fees do not affect the net price achieved through that venue.
TRPA is also concerned with SuperMontage's proposed method for handling adjustments in time priority when the size of an order is modified. An example of the inequity of the SuperMontage proposal is where an entity places an order in an ECN to set a new NBBO and, prior to its order being executed, another entity places an order in the same ECN at the same price. Under the proposal, the ECN quote would lose its priority and move to the end of the line. Thus, although the first entity set the new NBBO, it gets disadvantaged. TRPA recognizes that there are legitimate concerns that warrant the imposition of limits on the preservation of time priority in certain circumstances. For example, it would be unfair to permit the placement of a small order and allow continual size modifications to preserve priority with reduced risk. One way to prevent such a practice would be to program SuperMontage to "time stamp" changes in order size and execute orders based on the priority of each piece of a modified order in relation to other orders on the book. Although no approach is foolproof, TRPA believes the reward of preserving time priority outweighs the risk of abusive practices.
Once again, TRPA thanks the Commission for the opportunity to comment on this very important market structure issue. TRPA also looks forward to participating in future discussions regarding the development of SuperMontage.
Henry H. Hopkins
Managing Director and Chief Legal Counsel
Andrew M. Brooks
Vice President and Head of Equity Trading