November 16, 1998

Mr. Jonathan G. Katz


Securities and Exchange Commission

450 5th Street, NW

Washington, DC 20549

Dear Mr. Katz,

On behalf of Granahan Investment Management, I would like to submit comments regarding the Institutional Order Display requirement of proposed Regulation ATS, File S7-12-98.

Granahan Investment Management is a small cap ($440 million median market cap) stock manager, with over $1.1 billion in assets under management, consisting of mutual fund, pension, and annuity money. Seventy percent of our trading volume is in over the counter stocks, many of which are illiquid. The implementation of this regulation would affect us at least as much as any other institutional investor, so I urge you to consider our comments.

We believe Rule ATS unfairly targets alternative trading systems and their users. By imposing a requirement to display ATS originated institutional orders on the Nasdaq Level II screen, this rule would impede our ability to seek natural interest in our order anonymously, without disturbing the market.

It is important to realize that even a small order displayed on the Nasdaq screen in an illiquid stock can move the market, the effect being that the stock moves against us while we have executed nothing. To avoid this, we would be forced to talk to a broker, thereby revealing our identity and level of ownership, and allow the broker to search for a natural counterparty. This keeps us from having direct contact with other institutional buyers and sellers, thereby increasing our costs, and hampering our ability to achieve best execution for our clients.

While much attention is focused on assuring best prices for retail investors, the fact is, no investor trading in an open and diverse marketplace can ever be assured of getting the best price available. Regardless of whether a trade is executed on the floor of the New York Exchange or on Nasdaq or on an ATS or with a third market broker, there is always the possibility that stock will trade between two interested parties at some price better than the quote, and others, retail or institutional, can’t participate at that price. Not everyone can have the best price available at any given moment. To single out institutional users of alternative trading systems in an effort to provide better prices for retail investors is both unfair and counterprodutive. It reduces rather than enhances liquidity.

A retail investor actually has a distinct advantage, in that once she decides to buy or sell, she can usually do so at the stated price quickly and easily. She may be right or wrong in her investment decision, but market impact is typically not a concern.

As an institutional investor, we not only have to make good decisions, but also have to trade our orders so as not to lose money in the execution. To that end, we believe it essential that we maintain the ability to trade directly with other institutions and interested brokers anonymously so that we can preserve the returns

our professional analysis has achieved—for our retail investors.


Susan Ellis

Vice President, Trading

Granahan Investment Management, Inc.