From: aceplayer@telocity.com
Sent: Saturday, August 04, 2001 4:06 PM
To: rule-comments@sec.gov
Subject: S7-14-01

Penny trading on the NYSE has substantially increased intra-day
volatility.  I don't have statistics, but it can easily be seen by
comparing pre-penny trading with post-penny trading intra-day charts.

As a result, this adversely impacts small investors because small
investors use stop orders.  Greater volatility means the stops have to
be placed at a wider range in order to prevent them from getting
triggered.  As a result when triggered, the losses are greater.
(Placing them at the same range as when volatility is lower would result
in a greater percentage of stops getting triggered, also increasing
losses.)

That is why penny trading has hurt small investors.  To save 5 cents on
the spread, the investor loses a much greater amount on stops triggered
by greater volatility.

Why is volatility greater?  It is because the smaller increments reduce
the need to bid.  On the NYSE, bids are placed at a price so one can be
the first to be executed at that price.  Others bidding at the same
price will get filled after you.  When bidders can step in front of your
bid at negligible cost, it no longer makes sense to bid.  Hence traders
simply take offers or hit bids.  As a result, bids and offers shrink in
size.  This creates volatility and sharp price drops and run ups.

In the crash of 1987, one of the complaints was that market makers would
not step up and bid for stock.  Penny and sub-penny increments removes
the incentive to bid.  This is a very bad step for the stock markets and
hurts all investors, big and small.

Frank Yang
3738 Briar Hill St.
Mohegan lake, NY 10547
914-528-0924