January 12, 2005
I am writing to comment on the proposed Intermarket Trade-Through Rule of Regulation NMS. The firm of which I am the CEO is a proprietary trader on INET, ARCA, BRUT, and SUMO. On average we trade over 50 million shares per day, and more than 90 percent of our trades add liquidity to the markets on which we trade. We are automated traders and our operating profits, including all liquidity rebates and market data rebates, but net of SEC fees and clearing costs, average less than .001 per share traded.
With regard to the trade-through rule, I do not know if the Commission has properly addressed the question of why the quotes on one fully electronic market are different than the quotes on another fully electronic market. Our thin profit margin indicates that the business of providing liquidity to electronic stock markets is very competitive. We are linked to the largest electronic stock markets, and our firm is generally considered to be one of the most technologically adept participants in this business. If we had a statistical expectation of making a profit of even .0001 per share by buying on one market and selling on another, we would do so. The fact is that we are unable to make any more profitable trades than we make already. While prices on one electronic market may sometimes differ from the prices on another electronic market by a few cents, the length of time over which these differences persist is so short that we are not able to arbitrage the difference. At this point, making the arbitrage profit is too difficult technologically.
The relationship of our trading to the trade-through rule is that each electronic market which tries to coordinate its own prices to give customers the best price will face the same technological problems which we face. The coordination is impossible to do instantaneously. While allowing a window of one or two seconds may make the price coordination feasible, such a window would destroy the continuity and instantaneity which investors want while at the same time allowing virtually all of the existing price differences to remain. This would all take place at a cost of technological implementation to markets and participants which would be in millions of dollars and take months if not years of time. Technologically adept firms like our own which compete to make profits of under .001 per share already implement as much price coordination between markets as is feasible and which makes economic sense. Regulation cannot improve this situation.
I thank you for considering my comments.