May 12, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-6609
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. SR-NYSE-99-48
Ladies and Gentlemen,
Credit Suisse First Boston Corporation ("CSFB")1 is pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on issues relating to market fragmentation in the U.S. securities markets set forth in Release No. 34-42450 (the "Release"). As to the first portion of the Release, CSFB applauds the Commission on its recent decision to approve the New York Stock Exchange's ("NYSE") proposal to rescind NYSE Rule 390. This letter will address the second portion of the Release, which seeks to address the important structural issues facing the U.S. securities markets today, and especially the issues concerning the ability of U.S. investors to trade securities in multiple marketplaces.
1. Executive Summary
As a general matter, CSFB believes that the most capital and liquidity will be attracted to markets based on fundamental fairness, integrity, and execution quality, provided the markets are also the most technologically advanced and are permitted to advance through fair and open competition. Accordingly, CSFB is committed to promoting a market structure that captures the savings that technology can offer, and simultaneously offers transparency that can serve the interests of both retail and institutional investors. We believe in a regulatory structure that allows competitive forces to define the marketplace (subject to a counterbalance to tame potential excesses) such that no market player has a regulatorily protected niche. As such, we agree with the views set forth in the Securities Industry Association ("SIA") Letter to the Commission that free market competition will produce the best market structure for the U.S. equity markets.2 We believe that competition is a necessary agent of change.
CSFB, as a major global market participant, is acutely aware of the market's general preference for central price discovery and a lack of market fragmentation. Market participants benefit from a centralized liquidity pool, lower costs executions, and an open technological connectivity to the marketplace allowing access for retail and institutional investors as well as dealers. As such, CSFB supports the creation of an open linkage between execution centers that creates a single electronically linked book where dealers and investors interact in a hybrid market structure serving different customers (i.e., retail and institutional) and trading multiple instruments (i.e., equities, fixed income/convertible, options and, with some regulatory assistance, futures). Moreover, CSFB envisions that such a book could also be utilized to facilitate a variety of order types (i.e., market orders, limit orders, crosses, and quote driven as well as auction type trading). This structure, in CSFB's view, would promote externalizing orders for all types of customers, thereby enhancing transparency. The order flow within this marketplace would be subject to price priority
The trading world we see today is vastly different from the world of trading only a few years ago and the pace of change is accelerating. Technology has allowed systems to be created at bewildering speeds. Millions of on-line accounts have changed the nature of trading in our markets. Pure electronic auction markets are no longer a myth. Rather, millions of Americans make on-line bids for items through eBay every day. Globalization has caused corporations, individuals and markets to transcend national boundaries. Our customers today demand global sector trading. U.S. investors already have the ability to obtain real-time information about trading in foreign markets from multiple sources and to use automated order routing systems to execute their orders electronically. The U.S. equities markets have an international reputation that we cannot afford to lose - that of fair, safe and efficient markets.
We in the U.S., however, can and should learn from our global competitors. In some ways the European markets are ahead of those in the U.S. in terms of technological innovation. Trading on major European exchanges is now done electronically within centralized limit order books and several major European exchanges have demutualized. Europe, however, has different obstacles to overcome in order to be the home to a global electronic platform. Europe's markets are fragmented along national lines with nationally based exchanges, trading, and clearing. For example, in order to trade the 50 most liquid stocks in Europe, a dealer must belong to 8 exchanges and maintain staff to deal with multiple regulatory and clearance and settlement systems. Strong local interests support this nationally based infrastructure and have repeatedly thwarted efforts to develop a pan-European exchange. Change, however, is affecting these markets, as the recently announced merger between the Deutsche Börse and the London Stock Exchange indicates. It is rumored that this pan-European merger combined with an alliance with Nasdaq, could lead to a global trading system available 24 hours a day.3
Based on this technologically driven global expansion of trading, it would appear that an execution market's business has changed. In the words of Mr. Seifert, Chief Executive of the merged pan-European Exchange "[o]ur business isn't really trading in stocks or bonds. Our fundamental business is building systems, loading systems and operating systems". 4 It is a foregone conclusion for those who wish to draw liquidity to their marketplace that the ability to handle volume is the most important step in attracting trades.
3. Market Structure Implications
In view of the removal of one major barrier to competition, Rule 390, the Commission has requested in its Release whether competitive, and geographically disparate market centers will continue to meet the needs of investors by: (1) maintaining the benefits of vigorous quote competition and innovative competition among market centers; (2) encouraging and rewarding market participants (including both investors and dealers) who contribute to public price discovery by displaying trading interest that is widely accessible and can be easily executed by other market participants; (3) assuring the practicability of best execution of all investor orders, including limit orders, no matter where they originate in the national market system; and (4) providing the deepest, most liquid markets possible that facilitate fair and orderly trading and minimize short-term price volatility. These four enumerated goals have led the Commission to put forward six models (ranging from additional disclosure to far reaching market structure changes) that may help the Commission achieve these four goals.
It would appear to us that the goals of best execution and orderly markets embodied in goals 3 and 4 above can be easily attained through electronic links. CSFB, for example, has links to its offices around the world to have its customer orders executed in local markets around the globe on an instantaneous basis. We believe that it would be quite easy for us and other broker-dealers to establish similar links to a variety of U.S. markets, or, alternatively, for the markets to establish links amongst themselves. In this matter, we also agree with the SIA Letter that, especially given the historical difficulty in causing the ITS to innovate, that the linkages must: (1) employ state-of-the-art technology; (2) provide automatic or immediate execution capability; (3) provide representation in the governance of the linkage by all qualified market centers; and (4) provide access to all qualified market centers.5
CSFB also supports the Commission's goal of providing price priority as a means to promote customer protection and quote competition. We think that customer interests are best protected if a market center were required to forward an order to the market displaying the better price because it would force market centers to compete aggressively to attract order flow. Alternatively, an execution center that received the order could match the better price of the other market allowing a broker-dealer to chose among market centers based on other important market criteria such as systems capacity, customer relations, liquidity, and speed of execution. This approach would allow execution centers to innovate the services they offer continuously, while guaranteeing that a customer receives at least the best price available anywhere in the market.
As to those customers who wish to trade at prices better than those being offered in the marketplace for instant executions, they could place limit orders with market centers of their choice. We understand that the Commission is currently studying the idea of a CLOB similar to the one described in Option 4 in the Release, except that such a CLOB would be voluntary. CSFB believes that the efficacy of the CLOB may be dependent upon all market participants (including specialists and other market makers) revealing their entire limit order book. Such a limit order exposure could be a function of the enhanced electronic linkage described above. We would welcome the opportunity to continue the dialogue with the Commission and other market participants on this topic.
We appreciate the opportunity to comment on these important proposals, and hope that the Commission finds these comments helpful. Please feel free to contact the undersigned at 212-325-4498 or Raymond J. Dorado at (212) 325-7258 or Gautam S. Gujral at 212-325-5291 to discuss these comments further.
Very truly yours,
Joseph T. McLaughlin
|Cc:|| The Honorable Arthur Levitt, Chairman|
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Laura S. Unger, Commissioner
The Honorable Paul R. Carey, Commissioner
Annette Nazareth, Director, Division of Market Regulation
Robert L. D. Colby, Deputy Director, Division of Market Regulation
Belinda Blaine, Associate Director, Division of Market Regulation
|1||CSFB is one of the leading global investment banking firms, providing a comprehensive range of financial advisory, capital raising, sales and trading, and other financial products for wholesale and retail users and suppliers of capital around the world. CSFB operates in over 60 offices across more than 30 countries and six continents and employs more than 15,000 staff -- approximately 6,000 in the U. S.|
|2||Letter to Jonathan Katz, SEC, from Mark Sutton, SIA Market Structure Committee (May 5, 2000) ("SIA Letter").|
|3||See Andrews, City of London (and Frankfurt) - A German-Energized Market Merger in the New Europe, N.Y. Times, May 4, 2000, at C1. See also, Interactive Journal News Roundup, Deutsche Börse Chief Executive Seeks a Full merger Between iX and Nasdaq, May 11, 2000|
|4||Id. at C19.|
|5||SIA Letter, supra, at 6-7.|