From: rbernard@nyse.com [mailto:rbernard@nyse.com]
Sent: Wednesday, February 12, 2003 1:54 PM
To: Nazareth, Annette L.
Cc: pitth@SEC.GOV; atkinsp@SEC.GOV; camposr@SEC.GOV; glassmanc@SEC.GOV;
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Subject: Liquidity Quote: Joel Seligiman
Annette,
Thanks for coming back to me about Joel. It is, of course, your call.
However, please understand that Joel does not feel he can ethically express
an opinion except to you.
SMOKE SCREEN
That said, I passionately (can you tell?!) disagree with the view that the
analysis need go beyond what the committee addressed. If you reach for
this issue now and preclude differentiation at the screen, it's over. You
will be rejecting the Seligman Committee's competitive model for the market
for depth/enhanced data before the Commissioners ever gets a chance to
understand what the committee thought -- and why it thought it -- after a
year of argument and debate and many trees giving their lives. And given
the energy and investment that we have expended, I don't think we'll be
coming back for another round of regulatory roulette any time soon.
As to the granular discussion that we have been having about screen real
estate, that issue turns out to be a smoke screen. Breaking out the
"where's the beef" quote from the autocrap on the screen sacrifices no
utility in the NYSE-listed market. Why? Because answering the question
"Where can I find the best price?" and "Where can I find the depth I need?"
are separate inquiries.
Besides, no one uses the montages for NYSE-listed stocks anyway. Why would
they? The montage is nearly useless: as the chart in the covering email
to our 2/7/03 letter shows, the average spreads between the periphery
markets' "best"-priced quotes range from 22 cents to 78 cents -- against
our 6 cents.
We have further shown that if, in the future, another market -- say
Island/Instinet -- ever came up with a "where's the beef" quote, it's no
big deal. Adding another line in addition to the NYSE Liquidity Quote line
is both in Island/Instinet's interest and loses little utility.
Moreover, we have shown that time helps resolve the
differentiation(brand)/utility trade-offs anyway. Just imagine if we were
trying to sort this issue out when the inside market was at an eighth and
when screens were monochromatic and didn't do "windows". We can assume
that changes in technology and productivity will only make the resolution
even easier going forward.
Besides, utility concerns do not begin to arise until you have several
lines of depth quotes. That's a highly unlikely scenario given that no
market maker in its right mind would provide liquidity to its customers by
standing up naked on both sides of the market for depth.
So the smoke is gone. We're back to the basic "market solution" precept of
the Seligman Committee's recommendation and to the question of whether the
periphery markets should be able to "brand rub" their autocrap on our firm,
executable, size quote.
ANOTHER COMMITTEE?!
As to taking our chances with a reconvened Seligman Committee (I know it
was not a serious question, but you put your finger into an open wound
around here), I am confident that we would "win" again. We did not "pull
the wool" over anyone's eyes or "pull a fast one" on anyone. Our
consistent, principled approach would again be vindicated.
What I am concerned about is having to re-educate another group of
competitors (remember NASDAQ's "180" on these issues at the Seligman
Committee?) and to knock the stuffing out of the kind of straw men that
Roger Blanc set up in his letter for Bloomberg. (It's nothing personal
against Roger -- I am having lunch tomorrow (although I refused to buy) --
but he did miss a few meetings!) We're tired of being dragged back to the
starting line every 18 months by competitors throwing ropes your way and
urging you to tie and truss old Gulliver so they can get a leg up.
The consortia plans and the display rule knocked our Humpty Dumpty off the
wall a generation ago. Now, with depth data deregulated, we finally have a
shot at putting the execution and data pieces back together again -- in an
oh-so-modest way. And yet I find myself reading about multiple trading
cases decided when my Mom, rest her soul, was a teenager, and in a letter
from an unregulated complex that, over the last decade, has
vertically-integrated data distribution, order routing and execution. Why,
Bloomberg/Tradebook's Humpty Dumpty has been on a roll for years!
Commisisoners Campos told Bloomberg and the NYSE to "take it outside, boys"
-- to work out our producer/distributor issues like normal business without
involving the SEC. Well, we're doing that, and we are meeting with
Bloomberg again tomorrow. (It's curious, by the way, how the Tradebook
brass keeps showing up at our Bloomberg meetings!) And unless you guys
pull the rug out from under our negotiation by barring our requirement for
independent displays -- well, funny thing, but it seems to be turning out
that Bloomberg can, in fact, put a little NYSE eyeliner and eye shadow on
the face of their displays and make them look pretty good to their
customers without diminishing the value of their services. (I keep having
this vision of Gilda Radner, impersonating Kevin Foley, saying, "Never
mind!")
What I also am concerned about is that more than five years have passed
since another entity unregulated in the data space wrapped itself in the
NMS and pushed its business plan on the Commission by bushwhacking our
pricing action that halved our revenues for self-help quotes. (Too bad
Commissioner Campos wasn't around then!) Schwab characterized our pricing
action as a doubling of our prices (that's no typo, Annette) and pretended
that individual investors, and not Schwab (and Merrill), were paying for
consumer data. It has been three years since the Commission floated a
utility-ratemaking balloon that turned out to be made of lead. And it's
been 18 months since a lot of time spent by a lot of senior people
representing a cross-section of the industry (many exuding open hostility
to the NYSE's approach at the beginning, I might add) culminated in the
comprehensive and thoughtful report that Joel orchestrated and scribed.
Yet, the industry remains mired in consortia and display rule dysfunction.
And then, by the grace of God and the will of Allah -- or by happy
unintended consequence -- the Commission deregulates depth quotes through
decimalization. A 100 flowers bloom. Innovation springs forth.
And where do we find ourselves this fine January day -- five years gone by?
Borrowing a page from the Schwab play book, another entity unregulated in
the data space presses its particular business model on you in the name of
the national market system. An integrated vendor/ECN urges you to extend a
de facto display rule to depth/enhanced data. (With deepest apologies to
Bobby Kennedy), we're asking "Why regulate?" And they're asking, "Why
not?"
So, thank you very much, we'd like to pass on another opportunity to
educate our competitors and finish the process that started at the market
structure hearings. We'd like to stand on the platform of the Seligman
Committee's thoughtful work and argue our case to the Commissioners on how
to rid the industry of subsidies, rebates and the payment for order flow
that they fund, as well as end the other consortia and display rule
dysfunctions.
This email represents my personal views, etc. and [USUAL SEC
DISCLOSURE]. My colleagues can leave me twisting in the wind if need
be, whereupon I will retire to the shores of Lake Ontario and shoreless
Moscow. (Which is also why Britz made me sign last week's letter!)
Rich Bernard
NYSE
212 656 2222
"Nazareth,
Annette L." To: "'rbernard@nyse.com'"
Subject: RE: Liquidity Quote: Joel Selgiman
02/12/03 08:45
AM
I do not believe his assistance is necessary. This issue involves a
detailed analysis far beyond that addressed by the committee. Joel is
always welcome to express an opinion, and I have the highest regard for his
abilities, but I don't think it is appropriate to solicit his involvement
here. Would you like to take your chances and reconvene the committee?
Only
kidding!
From: rbernard@nyse.com [mailto:rbernard@nyse.com]
Sent: Tuesday, February 11, 2003 7:30 PM
To: nazaretha@sec.gov
Cc: colbyb@sec.gov; rbritz@nyse.com
Subject: Liquidity Quote: Joel Selgiman
Since Bob Britz and I have argued that what we are trying to do in
differentiating and branding Liquidity Quote follows from the Seligman
Committee recommendations, I sent a copy of our letter to Joel. I invited
his thoughts on the issue if he could find the time and still had an
interest.
In his responding email, Joel said he found our proposal very interesting
and was pleased with our development attempt, but felt he ought not to
offer a formal opinion in view of that fact that his work had been
performed at the request of the Commission. In a further exchange of
emails, I expressed my regrests that he felt he could not engage. He
repsonded by saying that, if you asked him to address the matter, he could
do so. He also said that I could represent to you that he would be glad to
help Market Reg in anyway he can and that you are welcome to contact him on
this.
If you think Joel's involvement would be helpful, he seems ready to respond
to your call.