Junius W. Peake
Monfort Distinguished Professor of Finance
Kenneth W. Monfort College of Business
University of Northern Colorado
1075 F Kepner Hall
Campus Box 128
Greeley CO 80639-0001
E-mail : email@example.com
Telephone: (970) 351-2737
FAX: (970) 351-1062
Home page: http://www.mcb.unco.edu/facultystaff/facstaffdir/peakej.htm
August 27, 2001
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: NYSE XPress Quote Parameters (SR-NYSE-2001-14)
Dear Mr. Katz:
The Investment Company Institute ("ICI") is certainly on the right track in their comment letter of August 7th, opposing the NYSE's amending its Rule on their XPress system. However, I believe their comments do not go far enough in criticizing the NYSE's system.
As the ICI stated in their March 1st letter to the NYSE, with copies to the Commission, laying the blame on the reducing of minimum price differentials from 6.25¢ per share to 1¢ per share, which the NYSE and others have tried to do, was specious. What decimalization did was to expose the inadequacies of the present Byzantine system for equity trading. The ICI's March 1 letter pointed this out clearly and effectively.
The NYSE's system continues to favor its specialists by giving them time to react to bids and offers send to them before requiring execution. Many institutional investors are reluctant to expose their orders to the floor, since it provides a golden opportunity for those with advance information to front run investors' orders, either for themselves or for their favored customers.
The Commission has already previously demonstrated its naïvité by permitting trading systems to be constructed and approved that do not require execution of like-priced bids and offers (locked markets) and even fail to execute bids priced higher than offers and vice versa (crossed markets). The NASD has recently fined a number of firms for failing to correct crossed and locked markets in a timely fashion, when the penalty should have been instant execution at what ever price was appropriate. The penalty for failing to maintain current and accurate bids and offers should be paid to the counterparty that had bid or offered correctly.
All U.S. equity trading systems are overly-complicated, costly and discriminatory against investors as a whole. Complaints about execution of large institutional orders seem to focus on the "extra work" of multiple execution prices because of decimalization. The proposed "cure" for this alleged extra work is to allow "clean crosses" of smaller orders entered by the same firm. But permitting the other side of a large order to "front run" other investors or market makers who had like-priced orders entered earlier seems to me to fly in the face of Section 11A's finding that: "It is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure-the practicability of brokers executing investors' orders in the best market."
The best market must contain the best possible prices for both buyer and seller. Buyers want to pay the least for each execution of their order(s), and sellers want to receive the most for each execution of their order(s). As I have noted before, the Commission has looked down the wrong end of the telescope by using the term "best execution" to apply to orders that require multiple transactions to complete, rather than to focus on each execution which may make up a single order, or may require several or many executions to complete an order.
Time marches on. The Securities Reform Act of 1975 became law on May Day, more than a quarter-century ago. The Commission was directed to: "facilitate the establishment of a national market system for securities." "Facilitate" is defined as "to make easy." Clearly, the Commission has not found a way to facilitate the establishment of a national market system for securities.
Once again, I urge the Commission to abandon its intensive micromanagement of every trading system, and allow price competition, rather than place competition to become the focus of regulation.
Very truly yours,
Junius W. Peake