November 11, 2009
Dear SEC Staff,
When the ISE proposed the identical rule change several months ago, I objected in comments dated Feb. 4,2009 Re. Sr-ISE-2006-26. The SEC approved the rule change over my objections and the objections of others. So I know I am fighting an up hill battle here. Nevertheless, I add the following comments to those I made in my letter opposing the exact proposal approved by you on behalf of the ISE.
The reason I continue is simple: The SEC is permitting a continuing and burgeoning distortion of the market place. It appears that the SEC either dosen't have the time or is not willing to determine the exact basis for these on going rule changes which discourage or deny participation by some users. The exchanges essentially hide their true motivation behind the nobel language of Section6(b)(5), language that is designed to protect the public interest, but is here preverted to do exactly the opposite. Yet, the SEC apparently buys these arguments.
I could expain in detail how all users(especially small users) are best protected by the maximum participation and competition by all users in the market place. I could go into detail regarding the tight markets penny pricing produces and how additional liguidity improves price discovery. I could encourage you to more carefully examine what you yourself recognize to be a form of "permissible discrimination" (what a slippery slope that is). But, what you need to do first is address the fundamental cause of these permitted distortions...payment for order flow. What these trumped-up rules attempt to do one way or the other is reward some order flow with payment or priority at the de facto expense of other order flow. Because the SEC allows payment for order flow, exchanges have distorted their business model until ultimately you have this tangled rule based mess: All derived from the original balloning mistake. One bad rule has lead to another and no one at the SEC is looking at the composite picture.
Finally, just as a practical matter, you have to question the motivation of a business which wants to impede participation by its largest customers.
Therefore, please take the time to analyse the motivation(s) for these rules and determine whether the SEC wants to be complict with the Exchanges in allowing and encouraging these distortions.
Thank you, Charles Cox