March 18, 2014
To Whom it May Concern
While I have already taken the opportunity to comment on SR-ISE-2013-72, I'd like to also submit comments related to this aforementioned filing and specifically the comments submitted by Ben Londergan of Group One trading.
In my experience and observations, I have witnessed firsthand the types of abuses Mr. Londergan discusses in his letter.
The QCC order type is heavily weighted toward creating disincentives for brokers to seek liquidity and achieve best price executions. In fact, quite the contrary to ISE's phony desires to "foster competition", they have laid the foundation for brokers to manipulate any semblance of a "fair and orderly" market, and get PAID to do it.
Furthermore, I wholeheartedly agree with Mr. Londergan's assertions that the ISE's proposal "limits exposure to only those parties in the upstairs community with which the broker chooses to solicit, most likely based on which parties are willing to pay that broker the highest commission".
To expand on this argument, I will go on to say that in fact, those very same "counter-parties paying the highest commission" will often instruct the soliciting broker that their interest is ALL OR NONE. In this regard the counter-party ensures the broker has an incentive to effect the QCC cross as quickly as possible so as to not solicit other counter-parties that might improve their market. The broker gets the commissions on both sides of the cross, the counter-party locks in an egregious edge, and the broker even gets an Exchange rebate just to sweeten the plot. Everyone wins ... except the initiating customer.
In fact, as it stands now Market Regulators have absolutely NO Method of ensuring best price executions for QCC orders. While FINRA and the Exchanges can and do regularly survey for best price execution of all types of orders, open-outcry and electronic, they have no facilities to ensure the same is held for QCC orders.
In it's current format, the QCC order can only be surveyed to ensure total contract size is large enough and that QCT exemptions are met i.e. appropriate hedge, and stock/options print at or near the same time. Brokers are not held accountable to show they achieved best price executions. They do not have to keep records of the quotes they received from counter-parties or even the amount of quotes they solicited.
Therefore the opportunity for a broker to collect commissions, receive an Exchange rebate, and not be held accountable for best price execution creates the perfect storm of moral hazard and conflict of interest. Surely not what the Commission is seeking to promote.
In conclusion, I agree with all of Mr. Londgren's concerns and would urge the Commission to not only decline the ISE's current proposal, but to additionally reconsider the QCC order type using market data collected over the past 2.5 years of trading these order types.
I'd be happy to help develop methods and collect data showing these findings.
Darren Story, CFA