Financial Information Forum

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609

July 3, 2003

Subject: Concept Release Petition relating to Uniform Trading Rules and Regulation Release No. 34-47849; File No. S7-11-03. File

Dear Mr. Katz:

The Financial Information Forum (FIF) is pleased to submit comments regarding the Concept Release Petition relating to Uniform Trading Rules and Regulation Release No. 34-47849; File No. S7-11-03. We are especially focused on the issue of sub-penny quoting and trading. FIF was formed in 1996 enabling market data vendors, exchanges, utilities, service bureaus and broker dealers to discuss and share information and solutions regarding factors that concern securities information processing in all aspects of the securities industry, from price discovery through clearance and settlement ( One such group is the FIF Market Data Committee.

The FIF Market Data Committee brings together market centers, consolidators, vendors and broker dealer to explore and address pertinent issues from an end-to-end market data infrastructure perspectives. This committee has worked closely with regulators on technical implementation issues for such projects as OATS, INSITE, Decimalization, Single Stock Futures and Market Structure.


  • Some market participants display order prices and trade prices in 1/10 of a penny and 1/100 of a penny.

  • Some display only in pennies.

  • Some have a mix with orders in pennies and trades in sub-pennies.

  • If SEC does not take action, all will have to handle sub-pennies, although it is hard to define at what level of granularity the increment war would stop.

Our Issue

We represent market data and order routing vendors, which will have to display and distribute this information. In particular, under the SEC Vendor Display Rule and the SEC Quote Rule, market data vendors and others are required by law to carry the prices supplied by the various Securities Information Processors (SIPs).

  • We already handle a considerable amount of data supplied under these plans that has little economic value in the marketplace and the traffic is continuing to grow.

  • Sub-penny pricing would have an overwhelming effect on option market pricing in terms of network traffic. Options traffic currently peaks at about 10,000 messages/second; infrastructure is being put in place to handle 52,000 messages/second.

  • Currently, sub-penny quotes do not show up in either the Nasdaq BBO or the NBBO for Nasdaq securities, leading to apparently locked markets. This results in a loss of transparency for market participants.

  • According to a Nasdaq study, a disproportionate percentage of sub-penny quotes now occur at .001 or .009 at three decimal places or at .0001 or .0009 at four decimal places. This lends credence to the argument that those prices occur so that participants can jump ahead of others, not because they have a different view about the value of the security.

  • Exposing the sub-penny spreads would seem to be a solution. But limits on the number of decimal places would still be required and any apparent benefit would be offset by much higher update rates and other unpredictable events.

  • Our subscribers present their information in a manner easy to use and understood by their clients, whom are both professionals and non-professionals. The human factor challenge of reading sub-penny quotes must be considered as we strive for clarity of prices. In addition rapidly changing quote montages may result in flickering quotes, which makes best execution responsibilities even more challenging.

  • There may be some implications that have not even been considered. For example would the move to sub-pennies for equities engender pressure to move options quoting to pennies? Some other activities that would require clarifications or new rules would be:

      Best Execution responsibilities

      Short sale rules

      Order routing and reporting implications e.g. OATS increased reporting due to order jumping of limit orders

  • Trading in pennies has resulted in more transactions with lower size. We can expect the same results from sub-pennies. This is encouraged by the market data revenue rebate programs, which return money to exchanges based on the number of transactions no matter how small the transaction.

  • Screen real estate is needed for additional useful services such as depth of book

Our Recommendation

We recommend that the minimum price increment for equities quotes and orders be a penny. Market data traffic rates have risen steadily although the share volume of business has been stagnant. This means much higher costs for all participants, including the beneficial buyers and sellers, who ultimately pay for everything.

The move to penny pricing from sixteenths created a six-fold increase in the number of possible price points. Moving from pennies to tenths would be worse, making a ten-fold increase in price points. Going to hundredths of a penny would cause a hundred-fold increase in price points! It is hard to estimate the traffic increase that might cause but we can be certain it would be large.

If history is a guide, this will not increase the overall share volume. All it will do is increase the costs for all participants, and again the ultimate buyers and sellers will have to pay.

Many buyers of market data now are looking for ways to mitigate the impact of increasing message rates, which are driving up their infrastructure costs but not improving their business. If the SEC does not act to stem the proliferation of market data that has little economic value, those in the marketplace will act independently to eliminate useless data. That may well reduce the benefits of openness and transparency achieved by the SEC over the past three decades.

Annette Nazareth Director, Division of Market Regulation stated at the SIA Market Structure conference of June 13th that the commission will be focusing with increased intensity on ensuring fairness and efficiency in the National Market System. Sub-penny pricing is not fair and the increased required infrastructure is not efficient.

We would urge the Commission to take a broader view of the impact of sub-penny pricing and its very real potential to actually reduce availability of market data and transparency in the securities markets.

Thank you for your consideration. If you require further information or clarification, please contact Kathy McGovern at (212) 652-4463.


W. Leo McBlain
  Thomas J. Jordan
Executive Director