September 21, 2004
I am writing on behalf of Telic Management LLC to comment on the NYSEs Hybrid Market proposal. While we commend the NYSEs effort to create a faster and possibly fairer marketplace, we have serious reservations about the proposal as filed.
Our first issue has to do with the significant lack of detail in the proposal itself. A novel market structure like the one proposed by NYSE will have significant subtleties, especially when the electronic time-price priority market interacts with the auction market as well as with other market centers. The proposal is written in vague language and does not spell out many of the details required to understand exactly how this hybrid market will function in practice and if it really will meet the needs of the investing public. Rather than repeat points highlighted by others, we defer in this area to the many excellent comments by Thomas Peterffy and David M. Battan of Interactive Brokers Group and by Eric D. Roiter of Fidelity Management Research Company.
Our second issue has to do with the proposed change to Rule 104 that would allow the specialist ...to implement proprietary algorithms that allow them, on behalf of the dealer account, to systematically supplement the Exchange published bid or offer, match bids and offers published by other market centers, and place within the Display Book system a specialist interest file at varying prices outside the published quotation.... The key point of contention is that there is no attempt to discuss or describe what types of proprietary algorithms would be allowed or what types of inputs those algorithms may utilize. Given the specialists privileged position within the NYSE market structure, the opportunities to exploit asymmetric information are significant. For example, can the specialist utilize information from the non-public aggregated broker agency interest?
Our last issue has to do with the notion that the entire proposal fails to provide any material inducement for non-NYSE-based liquidity providers to participate. In our opinion, this is a failed opportunity at meaningful market structure reform. In a real time/price priority market, all liquidity providers would compete on an equal footing. The proposed hybrid market structure continues to perpetuate asymmetric information between specialists, floor brokers and customers that only serves to discourage competing liquidity providers, such as my firm, from providing better prices and more liquidity to the investing public. While NYSEs proposal appears to be a step in the right direction, it falls short of producing a truly fair electronic marketplace.
Please feel free to contact me if the Commission or its staff would like to discuss these issues further.
Jose L. Marques
Telic Management LLC