Charles Schwab & Co., Inc.
Electronically-filed version. Also sending hard copy by overnight mail.
January 22, 2003
Re: Release No. 34-47091; File No. SR-NYSE-2002-55
Dear Secretary Katz:
Charles Schwab & Co., Inc. ("Schwab") appreciates this opportunity to comment on the New York Stock Exchange's ("NYSE") proposed rule to establish and disseminate Liquidity Quotations. Schwab could not agree more with the NYSE that "the advent of decimal trading has resulted in many more price intervals which can be the best quote, with the result that the highest bid and lowest offer may not reflect the true depth of the market at prices reasonably related to the last sale." We applaud the NYSE's development of the Liquidity Quotation product, which, if readily and fairly available to all market participants, could represent a great advance in market transparency and efficiency. However, Schwab is concerned that this product will not be readily available to individual investors, and the NYSE has not made vital information about the terms on which this product will be available.1 For these reasons, Schwab urges the SEC to withhold approval of the NYSE's rule proposal until both the SEC and the public have had sufficient time to consider its impact on transparency in our National Market System.
In particular, the NYSE's failure to provide a means to grant individual investors access to this critical data on reasonable and non-discriminatory terms is not consistent with the applicable standards mandated by the Securities Exchange Act of 1934. Similarly, the NYSE's decision not to include the Liquidity Quotations in, or allow its integration with, the consolidated quote (national best bid and offer or "NBBO"), and the NYSE's contractual restrictions on the display and redistribution of the data, also are inconsistent with the standards for a National Market System set forth in the 1975 Amendments to the Exchange Act.
A. NYSE Has Not Shown How the Liquidity Quotations Meets Exchange Act Requirements.
Schwab applauds the development of Liquidity Quotations, which could be the most significant development in listed market transparency in two decades. Under the proposal, NYSE specialists would show in their quotes additional depth (price and size) beyond the best bid and offer.2 As the SEC's own data has demonstrated, in the post-decimal environment, quote depth at the NBBO has declined dramatically in the exchange-listed (as well as Nasdaq) market. As a result, in a post-decimal world, depth of book market data is necessary for all investors to gauge interest in the market before trading, and then to monitor whether they are receiving best execution.
Because the NYSE's proposal involves market data and therefore has implications for transparency, the NYSE is correct that implementation of the Liquidity Quotations must be consistent with Section 6(b)(5) as well as National Market System principles under Section 11A of the Exchange Act.3 However, market participants need analysis and support, however, for the NYSE's belief - stated in the release - that its proposal furthers those principles. The NYSE needs to show how it will make the Liquidity Quotations available to individual investors at a reasonable price. We are concerned that, by restricting through contract terms how the Liquidity Quotations may be distributed and displayed, the NYSE's proposal fails to meet the following standards under the Exchange Act:
Any SRO rule proposal bearing upon quotations must be consistent with the purposes of the Commission's own National Market System rules, including the "Quote Rule"5 and the "Display Rule."6 The NYSE's proposal recognizes that it would alter the interpretation and application of those rules as applied to NYSE quotations. For example, the Liquidity Quotations would be a "firm" quote so that specialists and broker-dealers would not be able to back-away from them. Congress set forth the purposes of these National Market System rules in 1975, including:
The Liquidity Quotations could represent a significant advance in market transparency. Nevertheless, the NYSE's rule filing needs to cover the issues which have the most effect on the above National Market System principles and statutory requirements: how this data will be distributed, to whom it will be distributed, and what price NYSE will charge vendors, broker-dealers, and investors for the data. If as a result of this proposal, some market participants will receive the data but not others, then instead of enhancing transparency, the Liquidity Quotations will result in unfair advantage of some market participants over others. Such a result would violate the above Exchange Act standards. The SEC needs to assure itself that this is not the case. The SEC should require the NYSE to submit and justify its fee schedule and data contracts that pertain to the Liquidity Quotations for public notice and comment. Only then will the SEC have the basis for determining whether implementation of the Liquidity Quotations and their impact on individual investors and other market participants is fair, reasonable, and non-discriminatory.
B. The Commission Should Review the Overall Impact of NYSE and Other Recent SRO Market Data Proposals To Assure that the Public Interest Is Served.
In response to an advance comment letter filed by Bloomberg L.P. dated December 16, 2002 on the Liquidity Quotations proposal, the SEC reiterated its view that the contracts under which the NYSE distributes OpenBook, and will be distributing the Liquidity Quotations, includes "restrictions on vendor [and broker-dealer] redissemination and enhancement, integration or consolidation [which] are on their face discriminatory, and may raise fair access issues under the Act."8 It would seem that any restrictions imposed by the exchange affecting market transparency and the operation of the Quote and Display Rules that are facially discriminatory and result in the lack of fair access are matters of fundamental importance for the SEC to consider, if not resolve, before approving the exchange's proposal. It is therefore puzzling why the SEC's public notice for Liquidity Quotations goes on to state:
The SEC thus appears to be saying that, although the Commission's approval order for Liquidity Quotations may enable the NYSE to discriminate and deny fair access, because the NYSE has refused to submit for Commission review the very terms of its contracts that could have these discriminatory effects, the Commission need not consider them. This is contrary to the Commission's authority and responsibilities under Section 19(b) of the Exchange Act.10 As Bloomberg L.P. articulates in its December 16 letter, the terms under which the NYSE distributes and restricts Liquidity Quotations meet the definition of an SRO "rule." The Commission is the final arbiter of what is an SRO rule and what should be subject to public notice and comment and SEC review and approval.
The Liquidity Quotations proposal is only the latest example of how, through the piecemeal SRO rule filing and approval order process, the Commission may be inadvertently and fundamentally changing the National Market System without reviewing the overall impact of SRO actions.11 The net effects of the NYSE's and other recent SRO actions is the creation of a two-tier market for data and transparency that includes a bifurcated quote and enables the exchanges to control and profit from market data products to subsidize their competitive activities12:
* * * * *
The NYSE's failure to include a non-professional fee to enable individual investor access, and its restrictions on market data distribution appear discriminatory, anti-competitive, and contrary to National Market System principles. To assure that the Liquidity Quotations proposal meets the requirements of the Exchange Act, the SEC must first review the fee structure and the distribution restrictions, which are SRO "rules" within the meaning of the Act. The Commission should allow full public consideration of the impact of NYSE's proposal on market transparency and the Commissions Quote and Display Rules, especially the creation of a bifurcated quote for listed securities outside of the consolidated quote and National Market System Plans.
Accordingly, the Commission should postpone any approval and extend the notice and comment period after the NYSE supplements its filing to explain how this data will be distributed, to whom it will be distributed, and what price it will charge vendors, broker-dealers, and investors for the data.
cc: Chairman Pitt