July 14, 2010
This rule filing change should be denied.
The SEC should view with extreme skepticism any exchanges scheme that creates a two-tiered system in which select market participants (in this case, floor brokers and Designated Market Makers) receive critical supply/demand imbalance information prior to the public. The system of private market probes should be ended completely, and both floor brokers and Designated Market Makers should only be permitted to receive imbalance data through the same Order Information Imbalance datafeed that the rest of the public uses, at the same time as the public.
The NYSE has not met the high standard required to justify providing select members a first look at market supply/demand information, prior to the general public. Inexplicably, the exchange simultaneously argues that floor brokers require this information to provide market color to sophisticated customers, but that it believes this information would not be material to market participants executing automated orders. Ignoring the dubious premise that what is material to the sophisticated customers of floor brokers is not material to anyone else, the exchanges marketing and sale of its Order Information Imbalance datafeed suggests that the exchange itself believes that this information provides material value to many participants. This is not surprising: given that markets are priced based on supply and demand, what information could be more material than supply/demand imbalance information? Clearly, order imbalance information is material information. Regardless, the exchange does not have a mandate to determine which class of participants value which information. The exchange does have a mandate to ensure that all participants are on an equal footing, with the opportunity to receive the same data at the same time. The current system clearly fails this test and should be eliminated.
As an aside, the exchanges argument that this two-tiered system is required due to reduced staffing of floor brokers misses the mark. If Designated Market Makers and floor brokers have inadequate staffing, they should not be rewarded by receiving information prior to the rest of the market, they should simply hire the additional personnel required to fulfill their obligations or, the exchange may implement nondiscriminatory technology that affords more time to process the information. Until recently, order imbalance information was public disseminated at 3:40pm (five minutes earlier than it currently is) and if the exchange felt the currently fifteen minute window was inadequate, it could easily remedy this.
Finally, the SEC should consider how this system differs from flash orders. In both cases, select exchange partners are granted access to material public information about orders entered into exchange systems, albeit in this case the information may be provided minutes before public dissemination, instead of a fraction of a second.
In short, the SEC should deny this rule filing and separately require the NYSE to eliminate completely the private dissemination of imbalance information to a select few, prior to its public release.