DATEK ONLINE HOLDINGS CORP.
U.S. Securities & Exchange Commission
Attn: Mr. Jonathan G. Katz, Secretary
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Release No. 34-43616, File No. SR-NASD-99-65 (Nov. 24, 2000);
Creation of a Corporate Bond Trade Reporting and Transaction
Dissemination Facility ("TRACE") ___
Ladies and Gentlemen:
Datek Online Holdings Corp. ("Datek Online") is pleased to submit these comments on the pending amendments to the NASD's proposed rules to create for corporate bonds a facility referred to as TRACE (Trade Reporting and Comparison Entry Service). Datek Online Holdings, through its subsidiaries The Island ECN, Inc. and Datek Online Brokerage Services, has been at the forefront of empowering investors by providing its customers with unprecedented levels of real-time market data. Datek Online supports the goal of achieving heightened transparency in the market for corporate bonds traded over-the-counter. But, as we detail below, the opportunity to also advance other vital national market system statutory objectives will be sacrificed if the present TRACE proposal is approved now.
I. Competition-based Solutions to Market Data Dissemination Are Pending and Require Further Discussion.
NASD's TRACE rules would combine the roles of securities market, market regulator, data collector/processor, vendor selector, data vendor and arbiter of fee and administrative matters. We strongly believe that the SEC should refrain from awarding another such monopoly franchise for market information and thereby pre-empt the productive discussions that are now occurring within the Commission's recently constituted Advisory Committee on Market Information ("ACMI"). This is particularly so in the context of ACMI's active consideration of measures that would introduce market-based solutions for the collection and dissemination of equity pricing data. The initial ACMI deliberations reveal a strong attachment to fostering efficiency, innovation and price competition within the equity arena by modifying the current monopoly securities information processor ("SIP") model.
Datek Online applauds the Commission for its action in establishing ACMI to fully examine the complex, interacting regulatory, economic and technology issues that coalesce around the consolidation and sale of market data. As a member of ACMI we have submitted one of the five proposals presented and discussed at the December 14th meeting. All five of these proposals seek the substitution of a competitive model for the present SEC sanctioned monopoly SRO SIPs.
Datek's proposal recommends a regulatory framework governing market data that would introduce competition and innovation in place of the present series of monopoly processors (listed, Nasdaq and options), a single fixed technology and a single point of failure. The other proposals by the NYSE, Reuters Group PLC, Charles Schwab & Co. Inc. and Archipelago similarly share strategies to permit the introduction of competition and innovation in place of unitary, command decision-making.
The benefits to the markets from pausing the TRACE proposal far outweigh the minor delay that would result. The Commission has directed ACMI to complete its deliberations and report to the SEC by September 15, 2001. Dean Joel Seligman in his role as Chairman has indicated his resolve to meet this date. Under the current TRACE proposal the NASD has committed to make a separate Exchange Act section 11A application for its role as the SIP. Further, the NASD does not contemplate beginning Phase I TRACE testing until six (6) months after SEC approval in order, in its own words, to "give the NASD sufficient time to more fully test TRACE technology." In sum, TRACE will be improved if its approval is paused during the ACMI discussion since it will be a stronger proposal if the development processes surrounding the many SIP filing issues and testing of the technology are completed before the SEC approves TRACE in its current form.
By deferring approval of TRACE the Commission, more importantly, will advance the public interest and act in accordance with governing law. We urge that this important debate on how to bring the efficiencies of new technologies to bear upon the equity and fixed income markets must not be prematurely terminated by signally the continued reliance upon a single monopoly processor.
II. Inadequate Consideration Has Been Given to the Merits of an Open Network Model for Market Data Dissemination.
The rapid maturation and deployment of innovative open network information technology for disseminating market data has emerged as one of the most revolutionary developments transforming our nation's securities markets. The validity of the mainframe, government-conferred monopoly franchise methodology of 1975 is fundamentally eroded when innovative providers of market data have demonstrated the ability to assemble multiple real-time market data feeds and display the information for free over the Internet. With the sweeping changes in our securities markets as well as the dramatic advancements in technology, we now have an opportunity to comprehensively address the issue of market data and further empower investors. Consequently, we urge that additional consideration be given to fostering transparency within an open network technology.
III. Inadequate Consideration Has Been Given to Nasdaq's Technology Performance.
If the TRACE filing is approved, the NASD will contract with Nasdaq for technology and operational support of TRACE. Nasdaq's current technology performance is marked by its delay in equity decimalization, persistent Nasdaq capacity constraints and the growth of significant systemic risk to market centers such as Island and other broker-dealers due to SelectNet system delays.
TRACE development would be laid atop these immediately pressing issues and an already lengthy development pipeline that includes SuperSOES, SuperMontage, international expansion of Nasdaq, additional proprietary trading platforms, an investment adviser database of registered agents for one-stop national registration and T+1 processing. Nasdaq's failure in the present public record to address, much less to demonstrate, its operational ability to achieve the national market goals of efficiency and reliability with TRACE is itself a compelling reason to defer action until these process issues are fully addressed.
The Commission must first decide whether it is committed to at least exploring competitive solutions in the markets for equity and fixed income market data. Absent the full exploration by the SEC or ACMI-SEC of the opportunities now presented by rapid technology improvements to pursue the efficiencies, innovation and reduced systemic risk from a multiple, competing SIP data dissemination model, our markets will have missed a rare chance to harness technology to the achievement of the goals of the National Market System Amendments of 1975 to the Exchange Act.
If the Commission pursues, as we urge, a fuller consideration of the current opportunities for reform of the monopoly data model, whether by multiple SIPs-as we have proposed-or by an auction process of the monopoly SIP role-as others have proposed, then the objective of bond market transparency can be addressed within a larger array of National Market policy consideration.
Very truly yours,
Edward J. Nicoll
Chairman and CEO