Cincinnati Stock Exchange, Inc.
January 24, 2003
Mr. Jonathan G. Katz
Re: File No. SR-NYSE-2002-55, NYSE Liquidity Quote Proposal
Dear Mr. Katz:
The Cincinnati Stock Exchange, Inc. ("CSE") is submitting this letter in response to rule filing SR-NYSE-2002-55, submitted by the New York Stock Exchange, Inc. ("NYSE").1 Through this filing, NYSE is seeking to permit the display and use of additional quotation depth ("liquidity quotes") in the market for the stocks it trades. We agree with NYSE that the advent of decimal trading has made it so that the highest bid and lowest offer no longer reflects the true depth of the market. In that regard, we also support making market depth information widely available. That said, however, we do have concerns of whether the Proposal is consistent with fair access and vendor display requirements, as well as national market system objectives generally.
We believe the introduction of liquidity quotes raises compelling questions that must be answered before NYSE is permitted to move forward. Specifically, our questions center around the manner in which NYSE, and other markets that follow, will ensure the proper dissemination and display of liquidity quotes with other market data and the public accessibility of those liquidity quotes. In this regard, we believe the vendor agreements pursuant to which NYSE will furnish its liquidity quotes, or at least their content, are an integral part of the NYSE Proposal.
On a very basic level, absent the vendor agreements or at least a description of the relevant terms, we do not believe it is possible to fully understand and comment on NYSE's Proposal. The Proposal focuses on the NYSE marketplace rules that will be modified in order to give specialists the ability to post liquidity quotes and members the ability to enter orders to trade against those quotes. However, the Proposal does not discuss how NYSE plans to provide the ability to view and access these liquidity quotes nor the related market data fees that will be assessed. It does not discuss how vendors and users will be required to display the liquidity quotes. It also does not discuss how liquidity quotes will be considered with respect to trade-throughs. Without this information, it is not possible to evaluate the Proposal's compliance with the CQS Plan, ITS, or the national market system requirements contained in Section 11A of the Securities Exchange Act of 1934 (the "Act"). It is also not possible to evaluate the Proposal's compliance with the requirements of Section 6 of the Act.
Concerns have been raised that the downstream restrictions of NYSE's vendor contract provisions would operate to impose unfair access restrictions on small- and medium-sized market participants.2 Concerns have also been raised regarding whether NYSE's vendor contract provisions inappropriately restrict the display of its liquidity quotes in contravention of the Vendor Display Rule, Rule 11Ac1-2 of the Act.3 These fair access and vendor display concerns cannot be simply ignored and a response to them cannot be inevitably deferred.
Beyond the specific issues of fair access and vendor display requirements, related questions arise of how NYSE's Proposal will impact market data consolidation, transparency and fair competition among markets in the national market system for NYSE-listed securities, as well as impact the national market system generally. In considering NYSE's Proposal on this broader level, we note that market depth has been a topic of discussion with all the national market system plans. With respect to the plan governing trading in Nasdaq-listed securities (the "Nasdaq UTP Plan"), there is an ongoing discussion on use of the plan facilities to integrate the market depth information of each of the participant markets into the core market data that is already being consolidated. There has also been a movement toward ensuring fully integrated displays without the need to open separate "windows." In particular, this focus has been upon the need for integrated display of: (i) the Nasdaq Quotation Dissemination Service, which contains individual Nasdaq market maker quotes and the UTP participant BBO quotations ("NQDS"), with the UTP Quotation Data Feed, which contains the Nasdaq market and other UTP participant BBO quotations and the national BBO quotations ("UQDF"); and (ii) the OTC Montage Data Feed, which contains individual market participant quotes from the NASD ADF ("OMDF"), with the UQDF. Whereas the Nasdaq UTP Plan seems to be focusing on integration of market depth data, the NYSE Liquidity Quote Proposal seems to be going in the opposite direction. From what we have learned, we understand that NYSE's vendor agreements may prohibit the consolidated display of its liquidity quotes with the depth from other markets and require that its liquidity quotes be displayed in an unintegrated window. The inconsistencies that seem to be developing in the manner in which the two plans are evolving should be examined in light of the objective of the overall national market system.
The Commission has thus far declined to resolve the issue of whether NYSE is required to submit its vendor agreements for approval under Section 19(b) based on the fact that NYSE has not included its contracts as part of the Proposal, and therefore not sought approval of them.4 This circular logic does much more than permit the Commission to reserve judgment on whether agreements must be filed: it bifurcates the analysis of NYSE's marketplace rules from its market data rules. Given the intertwined relationship between liquidity quotes and dissemination of those quotes, it seems ineffectual and impractical to divide the two components for separate analysis. Moreover, even if it were appropriate to separate the analysis of these two aspects of market depth, NYSE should not be able to move forward until there is resolution in both respects. In other words, Commission analysis of NYSE's vendor agreements, or at least the content of those agreements, for compliance with Sections 6 and 11A should be a prerequisite to approving NYSE's Proposal to permit liquidity quotes. The alternative, i.e., the Commission approves NYSE's Proposal to permit liquidity quotes but does not require an analysis of NYSE's procedures and practices for disseminating and accessing those quotes, would produce an illogical and inequitable result: NYSE would have license to disseminate and provide access to those quotes through a facility that is not subjected to Commission oversight for compliance with the Exchange Act, in particular Section 11A and the rules thereunder.
NYSE's vendor agreements obviously must be consistent with the requirements of the Act, and, in this respect, they do have the effect of being rules of the NYSE. NYSE should be made to file and seek approval of at least a description of the relevant terms in its vendor agreements so that a determination can be made on the contracts complicity with these Act requirements. NYSE should not be able to opt out of this process. Even should the Commission determine that Section 19(b) is not the appropriate mechanism to evaluate the access and market data implications of NYSE introducing liquidity quotes, it still has jurisdiction to review NYSE's vendor agreements pursuant to Section 11A, as an update to its Form 1, or even upon its own initiative. The Commission cannot reasonably argue that it is appropriate to abrogate its oversight responsibility based on NYSE's failure to file the agreements when it has already recognized that "NYSE's restrictions on vendor redissemination and enhancement, integration or consolidation of OpenBook data are on their face discriminatory, and may raise fair access issues under the Act."5 Judgment on this issue should not be deferred.
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NYSE's introduction of liquidity quotes raises issues of fair access to firm quotes, compliance with vendor display requirements, the impact on trade-throughs in ITS securities, as well as fair competition among market centers. It also impacts the development of the national market system, not only with respect to the plan for NYSE-listed securities, but with respect to all national market system plans. Until the Commission has had an opportunity to considered the issues and respond, be it in reference to the present Proposal, a no-action letter, or otherwise, NYSE should not be permitted to move forward. For these reasons we urge the Commission to disapprove of NYSE's Proposal or, at a minimum, defer judgment until the information necessary to complete an analysis of its compliance with Sections 6 and 11A is made available and considered. We would be happy to answer any questions or further discuss our views with the Commission.
cc. Chairman Harvey L. Pitt