Subject: File No. S7-10-04
From: John Rankin

January 18, 2005

Dont protect us, PLEASE

The SECs proposed trade through rule that supposedly protects us from getting inferior prices will end up doing exactly the opposite in many cases. The idea that the trade through rule was created for the public is ridiculous. The trade through rule would exist only to slow down innovative companies and exchanges from leaving the outdated trading systems such as the AMEX and NYSE in the technological dust, thereby reducing their profits. Why must the government bureaucrats at the SEC try to level the playing field by dumbing down to the slowest system? The Trade Through Rule beneficiaries at the NYSE say that never trading a stock at any inferior price at any given millisecond in time protects the public. But there is so much evidence that this is simply not the case. Suppose I buy a stock at the best price. What is the price one second later? What is the price of the stock one minute later? Why do none of the pro trade through studies document what happens after a fill, or show the detrimental effects of a slow fill? Real time stock prices cannot be controlled accept by specialists. The so called price protection they offer us doesnt protect us at all if we buy a falling stock. Why listen to the benefactors at the NYSE for advice about a trade through rule when the NYSE is one of the least progressive exchanges? They have continued to drag their feet in upgrading their system because they loose more advantage every time they make an incremental upgrade. As proof of this, look at the dropping price of seats on the NYSE. We should listen to the exchanges that have done a good job at creating equal access to the markets like the NASDAQ, ARCA and the ECNs.

There are reasons why someone might want to pay more or less for something at any given time. Someone might want to pay up for stock and not risk a slow fill that could cost more money. The SEC needs to let the investor make his own choice about how and when to trade. The brokerage business is fiercely competitive in the area of getting better fills. The public will drop inferior products and drive those firms out. However, as with the NYSE there is little choice in that its clearly close to a monopoly. The NYSE also continues to lobby for backward rules that help maintain its stranglehold on volume and profits. We need freedom to choose a superior or inferior product, and I think thats obvious to just about any consumer who buys anything. The securities markets should be no exception. Creation of systems that perform better are why our markets get better. Legislating an anti-competitive trade through rule does exactly the opposite. Anyone who trades understands that sending an order to the NYSE is slow and cumbersome and can be very costly. Numerous exchanges and ECNs have come into existence over the last few years because they offer a better product that many people want. They offer speed, transparency through depth of book quoting, and the knowledge that orders will not be manipulated by a specialist with his own profit and bonus being his highest priority. The NASDAQ system was upgraded to compete with ECNs after loosing market share. I suppose they could have lobbied the SEC to put burdens on the ECNs to slow them down but that didnt happen. Now the NASDAQ is better than ever. The NASDAQ used to charge for orders and cancels, but with innovation and loss of market share knocking at their door, the trading fees on NASDAQ have plummeted. Capitalist competition worked again, not a set of socialistic rules that protect only the fat cats running the market centers. Competition has saved more money for the investor than any direct manipulation through arbitrary rules that benefit a select few.

As an example of why the trade through rule does nothing to price protect, lets say that an individual investor wants to buy stock ZZZ for 1.00 per share. He sees the price of ZZZ on ARCA at 1.00 on the offer. He wants to put his order to buy into ARCA at 1.00 because he knows he will be filled quickly, without a specialist holding onto his order to see if the stock goes down during the 30 second potential order hold time. He sends his order to ARCA and it takes 20 milliseconds to get there. But the inside price is 0.99 on the offer at the NYSE, which is a superior quote than that of ARCA. ARCA receives the order but sees that NYSE has a better price, and the trade through rule prevents any inferior price fills, so the order gets forwarded onto the NYSE, which takes another 20 milliseconds. The order is now 40 milliseconds old as it arrives at the NYSE. The 0.99 sell order on the NYSE disappears just before the order gets there and moves to a 1.01 offer. The 1.00 order now has to either be rejected back to ARCA or forwarded to another exchange that may be at 1.00, in this case guess who, ARCA. So off it goes for another 20 millisecond trip back to ARCA. As the 1.00 order arrives back at ARCA the order is now almost 60 milliseconds old, the 1.00 stock on ARCA disappears and moves to 1.01. Now the 1.00 stock that the investor wanted and could have had is gone. Note that the quote didnt disappear for almost sixty milliseconds after the investor entered his order. So what just happened to the price protection for this investor? The trade through rule just stopped him from getting the best price If there were no trade through rule, the investor would have gotten his 1.00 stock. Even worse, the investor now has to pay a higher price for the stock So instead of protecting the investor, it just cost him The trade through rule is worthless There are an infinite number of examples with different trade though amounts, pricing, and routing algorithms that can back this up. There are also an equal number of examples where the investor might have gotten a better price. I think the staff at the SEC needs to be honest about the large number of cases where the trade through rule will hurt investors. I have not seen any evidence other than a SEC bias toward the pro side of the trade through rule. If the staff at the SEC is incapable of producing fair and objective negative impacts of the trade through rule, along side the positive examples, why should they be able to create a rule that impacts so many? The point is that there is no price protection in the trade through rule. It can hurt investors as much as it helps them, and it never helps any investor with their long term position.

All the exchanges have provisions for clearly erroneous trades. So why create a socialistic trading system that says every trade has to print within the arbitrary trade through window? Perhaps it will allow the SEC to create yet another trade through rule enforcement division. This is great. Lets increase the SEC fee tax and hire more people at the SEC to enforce a useless rule Please leave the system alone If anything, learn from the innovators, not technological laggards like the NYSE who seem to be one of the main supporters of the trade through rule. Do not create a costly, anti-competitive, anti-capitalistic, feel good but useless rule and apply it to our capital market structures and then charge us to enforce it Our SEC taxes are high enough as it is If the NYSE is feeling pressure that the ECNs and competing exchanges like ARCA and NASDAQ are too fast for them, let the obsolete monopolistic giant fix its problem. Yes, a few fat cats will loose their advantage, but the benefits will be shared by the masses. In time the NYSE will have to go electronic or loose their market share. The idea that specialists can look at each order and make a decision about what to do with it is outdated at best and corrupt at the worst. I realize that some say if the trade through rule is adopted that the specialist will not be able to manipulate the stock as they can today. The specialists will find ways around it, just as they have with DOT and Direct Plus if a trade through rule is mandated. As the NYSE looses market share to faster more efficient and less biased systems, they will be forced to update. Dont apply roadblocks to all the exchanges and ECNs that have created the most efficient trading systems in the world, just because the NYSE needs to slow them down. Do you think the NYSE would want a trade through rule if they were the fastest system out there? I think not.

In summary, the trade through rules do NOT protect anyones investment accept the specialists high priced seat as well as market share for an outdated exchange. Forcing a trade though rule onto the markets in my opinion is anti-competitive government intrusion by mandating a rule that does nothing but hurt the innovators as well as the investors. All the exchanges already have provisions for clearly erroneous trades. The trade through rule will ultimately cost the masses more by increasing the SEC fee tax as well as forcing the innovators to slow down by building expensive routing systems. A trade through rule may however let the uneducated feel good, allow the government bureaucrats to create more government jobs, and inject so called social fairness into the system, and of course allow the NYSE to stall the inevitable creation of an actual competitive electronic trading system.


John Rankin