March 14, 2003
Mr. Jonathan G. Katz
Re: File No. SR-NYSE-2002-55
Dear Mr. Katz:
Instinet Corporation ("Instinet")1 welcomes the opportunity to provide the U.S. Securities and Exchange Commission ("Commission") with its comments in response to the proposed rule change submitted by the New York Stock Exchange ("NYSE" or "Exchange") as File No. SR-NYSE-2002-55.2 With this filing, the NYSE proposes to allow its specialists to disseminate through the NYSE additional quotations representing market depth in the securities traded on the Exchange in a new product called Liquidity Quotes.
Instinet appreciates the NYSE's efforts to develop and bring to market new products to better illustrate market depth available on the Exchange in response to the advent of decimalization and the dispersion of trading interest among a significantly greater number of price points outside the Exchange's inside bid and offer. At the same time, however, Instinet believes that the restrictions on data consolidation, integration and redistribution in the current Liquidity Quote vendor agreements, which have not been submitted as proposed rule changes under Section 19(b) of the Securities Exchange Act of 1934 ("Act"), may raise issues under Sections 6(b) and 11A of the Act. Consequently, Instinet believes that the Commission should take the necessary steps to ensure that such issues are appropriately addressed in the context of any further Commission action on the Liquidity Quotes proposal.
The data consolidation, integration and redistribution issues raised under Section 11A of the Act by the Liquidity Quotes vendor agreement appear to be quite similar to those identified by the Commission in 2001 in its notice publishing for comment the NYSE's proposal to establish a fee schedule for its OpenBook data product.3 It is not surprising that the Liquidity Quotes and OpenBook data products share these issues, as the two products share the same supplemental terms to the standard NYSE vendor agreement.4
The Commission raised the data consolidation, integration and redistribution issues regarding the OpenBook vendor agreement on its own initiative, as the NYSE did not submit the vendor agreement as a proposed rule change pursuant to Section 19(b) of the Act. In approving the OpenBook fee schedule, the Commission noted that it was not approving or disapproving the OpenBook vendor agreement, but indicated that the restrictions in the agreement "are on their face discriminatory and may raise fair access issues under the Act."5 In the Liquidity Quotes Proposing Release, the Commission already has noted that it is not necessary to resolve the issue of whether the vendor agreements should be filed under Section 19(b) of the Act prior to publishing the Proposal for comment.6
While its actions with respect to the approval of the OpenBook fee schedule and the publication of the Liquidity Quotes proposal have been appropriate as procedural matters, the Commission should not allow process - in the form of the absence of a proposed rule change containing the vendor agreement - to prevent it from squarely addressing the significant issues this agreement presents under Section 11A of the Act and the rules promulgated thereunder. Resolving these issues takes on added consequence in the context of the Liquidity Quotes proposal, as unlike OpenBook data, Liquidity Quotes will represent firm quotations that are available for interaction with trading interest, and will include interest at the NYSE best bid and offer prices - thereby implicating not only Section 11A(c) of the Act, but Rules 11Ac1-1 (the Quote Rule) and 11Ac1-2 (the Display Rule).
Consequently, Instinet recommends that the Commission withhold taking any action on the Proposal until the NYSE supplements its filing to include the vendor agreement, which will provide the Commission with a sufficient basis upon which to make a determination as to whether the Liquidity Quotes proposal in its totality, including the terms under which the NYSE plans to implement it, is consistent with Sections 6(b) and 11A of the Act and the rules promulgated thereunder.
Please do not hesitate to contact the undersigned at 212.310.7548, if you should have any questions regarding this matter.
cc: Annette Nazareth, Director, Division of Market Regulation