Richard A. Grasso
Chairman and Chief Executive Officer
New York Stock Exchange, Inc.|
11 Wall Street
New York, NY
March 11, 2003
Hon. William H. Donaldson
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Dear Mr. Chairman:
We are advised by the Market Regulation staff that they will involve the Commissioners in making a determination regarding our filing for NYSE Liquidity Quote ("NYLQ"). My partner, Bob Britz has previously met with each of the Commissioners to explain the product and reflect our views based on discussions with the staff.
NYSE is proposing to introduce a new market information and order execution product - NYLQ. NYLQ will provide firm, actionable (through brokers or through the system) bids/offers away from the inside market. These quotes will reflect significantly greater size than currently available at the best bid/offer ("BBO"). Importantly, NYLQ will also automate the dissemination of NYSE inside quotes.
NYLQ will offer several improvements to the current state-of-the-art. It will restore the size transparency that was lost to decimalization and will facilitate trading in sizes larger than typically found at today's BBO. It will provide another opportunity to execute in size through the system via our Institutional Express product. It will result in faster dissemination of the BBO. And NYLQ will provide protection of, and price improvement for, limit orders on the electronic book when executions occur at NYLQ bids/offers. These user benefits of NYLQ are universally acknowledged.
We have developed NYLQ at our own initiative for three reasons. First, we want to deal with the post-decimals transparency issue. Second, we want to be recognized as a provider of useful, quality information products. Lastly, we want to compete for orders, in part, on the basis of the information we provide to the market.
We have invested a substantial amount in the applications software and the infrastructure to support production and distribution of NYLQ. We have no expectation of a "hard-dollar" return on our investment (indeed NYLQ is distributed free to NYSE OpenBook subscribers). Our hope is that the marketplace will reward us for being forthcoming with meaningful information by sending orders to the NYSE.
That is more likely to happen if our customers are able to distinguish our data products and strongly associate them with the NYSE and if the NYSE is able to maintain the quality of the product. Hence NYSE Liquidity Quote or NYLQ. We propose to support this brand through vendor display terms that require identification of the data as such, and that preclude its display among an array of inside bids/offers (including the NYSE's). We do not prescribe format, design, location, etc. We do not restrict enhancements to the content. We in no way inhibit other markets from developing/displaying their own formulations and branding/promoting them as they see fit.
The Market Regulation staff apparently believes that the NYSE may launch a branded product but that it may not require vendors, through contract terms, to respect the brand through such normal conventions as service marks, packaging, and quality control. They have advised us that we must allow vendors to homogenize our liquidity quotes with other markets' inside quotes (no other market currently has anything akin to NYLQ) thereby destroying our ability to present differentiated, quality data to the marketplace. By definition this will remove our brand. I believe that a proprietary innovation of one market should not, by government fiat, be diluted by others who lack differentiated customer offerings. In the consumer product world, what the staff suggests would be the equivalent of the Food and Drug Administration allowing wholesalers to insert a few Advil capsules into each vial of Tylenol.
The staff effectively wants to extend the consolidated Display Rule to NYLQ. This despite the fact that: 1) the Rule's application to the inside market is widely viewed as a failed example of "regulatory engineering" and 2) the SEC's Advisory Committee on Market Information recommended against the position the staff is now taking.
The quote competition that the Display Rule intended to engender never materialized. The determined behavior of our competitors to autoquote significantly away from the NYSE BBO, solidifies daily the perception of the quote montage in listed stocks as an array of useless information.
Why would it be appropriate to position a unique, actionable depth product (NYLQ) within a series of inside quotes? To stay with the pharmaceutical metaphor, that is like putting an antibiotic in a container of analgesics. The BBO answers the question "Where can I find the best price?" Liquidity Quote answers a different question: "Where can I find the depth I need?"
Why would it be appropriate to permit a distributor to display a highly relevant depth product (NYLQ) in a container of irrelevant inside autoquotes? Brands are all about positioning - about the connection the consumer makes with your product. I can think of no worse positioning for NYLQ than to be relegated to a bin of generic, irrelevant rubbish.
I think this boils down to a straightforward question: Can a market launch a branded information product? If yes, then vendors must accept/respect the normal conventions of a brand. If no - and we can find no grounds for such a position - then the Commission is saying that markets may not compete on the basis of information. The SEC's Advisory Committee on Market Information said just the opposite: "Market centers should be permitted to distribute additional market information such as limit order books free from mandatory consolidation requirements". The Advisory Committee also stated: "A substantial majority of the Advisory Committee… does not believe that vendors or broker-dealers should be required to furnish deeper information to customers, on either an individual or consolidated market basis. Once the provision of full core information is assured by the Display Rule, the extent and manner of dissemination of deeper market information can be determined by market forces, i.e., by the business decisions of the individual market participants rather than by regulation. Attempting to mandate the display of deeper information, among other things, would create inflexibility and exacerbate "one-size-fits-all" informational concerns".
Markets will not do what the Advisory Committee encouraged if, through SEC intervention, their information gets expropriated, homogenized, and reduced to a generic-only world. And important new information products that respond to real needs of the customer world will not get developed.
Richard A. Grasso
Chairman and Chief Executive Officer
New York Stock Exchange
|c:||Hon. Paul S. Atkins, Commissioner, SEC|
Hon. Roel C. Campos, Commissioner, SEC
Hon. Cynthia A. Glassman, Commissioner, SEC
Hon. Harvey J. Goldschmid, Commissioner, SEC