July 10, 2014
rule 34-72333
it appears to me that the qualifications of "lead marketmaker" (LMM) is not explained.
questions:
1) can there be only one LMM or can there be more than one LMM?
2) what order types qualify as "displayed liquidity"? do post-only orders qualify?
3) can LMM step in front of the queue in order to execute a trade and still qualify for the LMM standards? is there any standard for determining whether a LMM is predatory or passive? the ability to be on both the bid and ask queues at the same time poses significant ability to manipulate price.
4) how long does a LMM have to "display" their order in order to qualify?
5) what are the other requirements that must be met by an LMM, such as past experience? what are the disqualifying requirements for an LMM? should a failure-to-deliver disqualify an LMM? should an LMM have to report their trades daily to FINRA?
6) can LMMs quote in increments less than a penny? is this good for the market?
7) should an LMM be allowed to place their orders through more than one exchange at a time for a traded security? i often see queues moving simultaneously up or down on the bid and ask, with the entire orders on several exchanges moving at one time.
8) while a marketmaker can see the order book, the retail investor might only be able to see orders that the marketmaker wishes them to see since some orders are not displayed.
i often see rule proposals that claim that all of these changes benefit the investors. however, most of these changes benefit the customers of the exchanges: the marketmakers and brokers. any cost savings on an individual order has to be weighed against all the shortselling permitted by the exchanges which lowers the price of the security because it overwhelms demand, lowering the price through the supply and demand curve. if a marketmaker is responsible for a large trading volume in the stock, then perhaps the marketmaker is making money by manipulating price. that is not a benefit to the investor.
while marketmakers might say that they are important to the investors, this is probably untrue. marketmakers need investors so that they can trade against the investor rather than allow the investor to find the other side of the trade in the market. marketmakers also need to find the other side of the trade in the market but they want to do so at a price advantageous to them. marketmakers are just middlemen and they should not control a market by overwhelming advantages awarded to them by the exchanges. while marketmaking is extremely profitable, this is because of the advantages accorded them by exchanges. the investors have to be paying for the marketmakers but the marketmakers are not servicing the orders marketmakers have adopted predatory practices with the aid of the other financial actors in the market.
i am not convinced that marketmakers are good for the market in general nor good for investors in a stock
specifically. therefore, i question whether benefits are necessary or useful to the market.
the exchanges always indicate that their rule proposals are consistent with the law and custom. this does
not mean that the rule proposals are good for the market in general. while the exchange indicates that it
does not unfairly discriminate between customers, issuers, brokers or dealers, this is untrue. it is the
intention of the exchange to discriminate against various classes of users in order to provide premium
services and reward select participants. further, these practices encourage short-term trading and
speculation, a risk to the market in general. it is insufficient to state that if people are offended by the
fee structure that they can trade elsewhere. investors often cannot choose where their orders will trade.
apparently some brokers have executed "secret" agreements and not inform their customers of such agreements.
these agreements or price benefits often determine where the broker will place their orders.
i think the practice of exchanges paying rebates to be discriminatory against the investor. i further think
that the exchange/brokers/clearinghouses often conspire against the investor in order to enable actors in the
market to:
avoid market deadlines
avoid reporting standards
avoid disclosure of practices to investors, such as co-location
avoid giving investors a timely report of price and quantity available
those reports that are given are often inaccurate and are given well after the trade. information is
important in determining pricing and availability but the financial actors are not willing to give the retail
investor good information.
worse, the regulators also do not enforce rules sufficiently to curb these practices. fines appear to be
accepted by the financial community as a small tax and there is little prosecution of the most outrageous
practices, merely because "this is the way we do things". there appears to be little reflection upon the
damage that these practices inflict on the market and the errant actor is allowed to continue operating in the financial industry. it is not the SEC's mission to protect the financial operators in the market. i don't know how the SEC has become confused about this. i see little representation of institutional investors or retail investors on an advisory board that could examine these practices. instead, the regulators seem to ignore the financial impact of these "new ideas".
C, on page 9, is priceless.
exchanges frequently propose rules that are described relatively opaquely. sometimes exchange practices even differ from the rules as proposed by the exchange. this would mean that exchanges should stop the practices immediately because they were not approved as written. however, i have not seen this occur once.
i think rules should not be put into practice until after a comment period and a regulator review. i see no emergency that would drive the exchange to adopt the rule immediately.