This letter is in response to the recent proposal by the SEC to enact the SuperMontage legislation. There are a variety of ways to explain why this action is harmful to the spirit of competition. But the key point to state is that the legislation has a tendency to exacerbate a monopolistic condition.
An analogy to the structure of the internet is apparent. The internet was originally started as a high tech system for ensuring a secure, reliable communications link in the event of a war. The internet is made up a network comprising numerous nodes. Any transmission along the network can be routed through any number of paths. One of the core strengths of the network is that large sections of the network can go down yet we can still have a reliable network with limited effects on the overall network. As time has passed the network has grown and so has the traffic on the network.
The NASDAQ market operates in a similar fashion. We have investment banking firms making markets in Nasdaq securities, ECNs managing limit order books with predominantly instiututional customers, retail brokerages crossing orders with individual investors, and large institutions such as Fidelity and Putnam with their own internal order flow from the actions of their fund managers. As can be imagined these different market participants have pools of liquidity that ebb and flow over time. On any given day liquidity in any one venue may dry up, but this liquidity may be replaced by some other trading venue. Yet, some of the trading venues consistently have deep and extensive pools of liquidity. As time has passed the broker dealer community has grown and trading volumes have also expanded over time.
Let us now imagine that the traffic on the internet was constrained to flow only between one pipe. As any number of experts would agree, most likely we would be best by regular disruptions of our internet medium because of congestion in the network. As is known from experience on rare occasions we have technical issues at some of the nations's leading internet infrastructure and technology companies such as MCI Worldcom who operates a large portion of the internet backbone and Yahoo that manages the leading internet directory service. However, technical disruptions at either of these companies do not imply that the internet will grind to halt. On the contrary, we may experience delays in retrieving information from the internet or slowness in service but the internet still functions. Thus the internet has demonstrated time and again to be a robust and scalable network.
Similary, if the trading systems at Schwab or TD Waterhouse were to go down and render their customers unable to trade, there is only a minimal disruption to trading. Many investors have multiple accounts at different brokerages specifically for dealing with such situations. No brokerage holds a lockhold on liquidity especially in the unlisted market and the result is that investors have a large choice of liquidity providers. For a variety of reasons trading in the Nasdaq market is very robust and one of the primary reasons is because of the variety and diversity of trading venues (e.g. market makers, private stock exchanges, ECNs, and so forth) that offer liquidity to investors seeking to gain equity exposure or rebalance their portfolio holdings.
Now with SuperMontage we are maneuvering to place a mechanism that is akin to a valve on the flow of capital into our nation's fastest growing security market, the Nasdaq. Despite all assurances that the proposed SuperMontage system is voluntary we move forward toward a single pipe. Students of the free markets philosophy realize that we moving dangerously in the direction of lack of choice and monopoly.
This is what we are proposing to do to our nation's security markets. We are proposing to restrict our flow of liquidity to flow into only one pipe. But is this single pipe really what is best for the individual traders, private investors, retirees, and other participants in America's markets?
New York, NY
NB My opinions do not necessarily reflect the views of my employer, Instinet Corporation, but rather reflect those of a concerned citizen and active participant in the US securities markets.