From: sage@sagesecurities.com [asles@sagesecurities.com] Sent: Thursday, May 20, 2004 11:12 PM To: rule-comments@sec.gov Subject: SR-NASD-2004-057 - Proposed Amendments to Reduce the Reporting Period for Transactions in TRACE-Eligible Securities Sage Securities Corp. 4 North Drive Great Neck, NY 11021 515-466-1001 asles@sagesecurities.com May 20, 2004 Honorable Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Dear Mr. Katz: Re: No. SR-NASD-2004-057 - Proposed Amendments to Reduce the Reporting Period for Transactions in TRACE-Eligible Securities I have been active in the corporate bond market for over 25 years. My firm Sage Securities Corp. is a very small NASD member, a significant part of whose business consists of executing trades in the corporate bond market for customers. I have long been an advocate of the implementation of better surveillance of the fixed income marketplace. I understand the importance of TRACE. I respectfully request that the following issues arising under current and proposed NASD rules, interpretations be more carefully reviewed before we “Reduce the Reporting Period for Transactions in TRACE-Eligible Securities”. I would like to point out that the mechanics of the corporate bond marketplace and the equity marketplace are distinctly different. The bond market is a “true” over the counter marketplace; most orders are still entered orally, executed orally, and reported orally to counterparties. The equity market is almost totally computerized. All one must do is look at NASD Rule 6230(c), Transaction Information To Be Reported, and the 13 items which must be included in a TRACE report to understand the differences between a bond report and an equity report. The notion of reducing the reporting time of trades on TRACE to what is appropriately feasible for an equity trade on Nasdaq on the theory that they are similar is mistaken: it’s like trying to fit a round peg in a square hole. In order for Sage to be compliant with the reduced Reporting Period for Transactions in TRACE-Eligible Securities, it will incur significant costs in both technology and personnel. This will put a tremendous financial burden on a small broker dealer like Sage Securities. The second point which I would like to address deals with NASD Rule 6210(d) “time of execution” and its interpretation as stated in the NASD TRACE website, Frequently Asked Questions www.nasd.com/mkt_sys/trace_faqs_reporting.asp. “If I am a proprietary trader and typically place orders with other dealers, must the execution time that I report be the same as the contra side executing broker? Yes, You need to ask the other broker/dealer to supply the exact execution time when you are notified that your order has been filled, You must report your trade to TRACE within 45 minutes of the execution time, so it is important to stress to your counter-party that you need timely notification of the fill so that your report will not be considered late.” I believe this interpretation is in opposition to the rule itself. Rule 6210(d) states “The term “time of execution” for a transaction in a TRACE-eligible security shall be the time when the parties to the transaction agree to all of the terms of the transaction that are sufficient to calculate the dollar price of the trade…” As I have stated most corporate bond orders are entered, executed, and reported orally. There is an often-used phrase, which defines the completion of a corporate bond trade, “as a meeting of the minds”. This can not happened until a report is given and accepted. The word “fill” is used in the equity market place. Almost all reports that complete an equity order uses the word “fill”. In contrast, the phrase, “You Buy” or “You Sell” followed “I Buy” or “I Sell” completes an execution the corporate bond market, without which there is no “meeting of the minds”. The Frequently Asked Question interpretation of this rule misses the mark and creates more confusion than it answers. I ask you how can you Reduce the Reporting Period for Transactions in TRACE-Eligible Securities when the rule and its interpretation are in conflict. Before this rule can be enforced or changed we must have an answer to the question “when is a trade a trade”. In an active or volatile market the process of entering, executing, and reporting a corporate bond trade orally often exceeds the proposed time of 15 minuets for reporting a trade to TRACE. Sage Securities and many other firms are hard pressed to operate within the reporting period now in place. If the proposed rule is enacted, I will be forced to enter a trade execution in TRACE before I will be able report the trade to my client. The last point I would like to address is how we must report agency transactions as dictated by NASD and TRACE. In the TRACE User Guide, Version 1.05 page 17, “How to Report Agency Transactions In order to capture a complete audit trail for regulatory use, agency transactions need to be reported in the same way that principal transactions are reported. What this means is that if your firm acts as an agent for your customer, the trade reports you must submit will “look” like a you stood between your customer and the contra party…” The reporting of agency transactions as if they were principal transactions can be confusing and cumbersome, especially for small firms, and is inconsistent with the fundamental nature of an agency transaction. Making an agency trade “look” like a principal trade serves no purpose. Again, I will refer to the NASD TRACE website, Frequently Asked Questions www.nasd.com/mkt_sys/trace_faqs_general.asp “Why Did NASD create TRACE? In 1998, the SEC began reviewing the debt markets in the U.S., with particular emphasis on price transparency. The SEC then requested that the NASD take three steps to enhance the transparency and the integrity of the corporate debt market…” Submitting trade reports that will “look” like you stood between your customer and the contra party does not enhance either the price transparency or the integrity of the corporate bond market. What it does do is create additional bookkeeping more expenses and the potential for regulatory confusion particularly for the smaller NASD broker/dealer. Again, I am an advocate of better surveillance of the fixed income marketplace and realize the principals that lead to the creation of TRACE. I respectfully request that the issues arising under current and proposed NASD rules, interpretations be more carefully reviewed before we “Reduce the Reporting Period for Transactions in TRACE-Eligible Securities”. Respectfully submitted, Alan H. Schlesinger