Subject: File No. S7-10-04
From: James L. Rothenberg

June 30, 2004

The proposed trading rules opt-out provision does not consider the impact on the other side of the trade from the initiating order. Absent a consolidated limit order book CLOB trading requirement across markets or at least the primary market, investors who supply liquidity and depth at superior prices will not have their orders executed. A primary requirement of system wide trading rules should place on parity both sides of any transaction. Protection of public customers, a long-standing policy of both the Congress and the SEC, cannot be acheived where one side of a transaction in the name of speed and is able to avoid its best execution requirements and disadvantage the other side of the transaction.

The SEC should also take this opportunity to abolish payment for order flow practices. While stock trading in pennies has slowed somewhat the expansion of this conversion of customer property by broker-agents, the payments for order flow are unabated in the five cent spread option markets. Nowhere in the approvals of this practice has the SEC stated that it sought to expressly preempt state civil and criminal laws regarding conversion or larceny. However, both federal and state courts have held that the SEC has considered the issue and such consideration constitutes either express or implied field preemption. The effect of approval of payment for order flow practices has created a pay to play environment that directly undercuts the position the SEC has taken in the municipal bond market. If the issue for decision is whether a larcenist or a fiduciary could avoid civil or criminal responsibility by informing the victim of the act and by suggesting that the victim could obtain further information upon request, the outcome would be easily reached. Why payment for order flow was ever permitted remains a reasonable question. The answer, of course, is industry pressure cloaked in the guise of fair competition. Corrective action is long overdue and mandated by legal principles established centuries ago.