1536 10th Ave.
Greeley, CO 80631
September 27, 2000
Secretary Jonathan Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
RE: File S7-16-00
Dear Mr. Katz:
In the introduction of the proposed rule the issue of market fragmentation was addressed first, and as such it shall be the first addressed in this letter. I agree with the majority in expressing "serious concern about market fragmentation in general" and payment for order flow practices.
As your proposal later states there is "potential for internalization and payment for order flow arrangements to interfere with order interaction and discourage the display of aggressively-priced quotations." You then go on to state, "payment for order flow practices have contributed to an environment in which vigorous quote competition is not always rewarded." If it is indeed the Commissionís view that maintaining the benefits of vigorous quote competition among market centers is a concern of investors (as mentioned in the second paragraph of the introduction) why are such practices still in use? Furthermore, it seems that such practices violate the principles of agency that require that a broker seek the most favorable terms available for a customerís transaction.
My question for you is "if the views of investors responding to the Fragmentation Release are so unanimous that payment for order flow is a bad thing why is an "in-depth study" by the Office of Economic Analysis needed?" Isnít the whole point of this all an investor friendly national market system? The investors have spoken.
Next your proposal looks at competition among market centers. While I agree that market centers have an incentive to offer improvements in execution and to reduce costs to attract order flow, I also wonder if they should. Fragmentation has tied the equity markets into a Gordian knot. It seems to me that there has to be a way to utilize technology and create a national market that will please the investors and resolve best execution issues for all trades.
You may even be able to kill the proverbial two birds with one national market system and take care of the need for disclosure. No longer would there be differences in actual price and "best bid and offer" (BBO). No need for to-the-second tracking of trades in the same security at multiple marketplaces anymore. Investment advisors and there customers will no longer have to wade through mounds of information dealing with which brokerage is "best" this quarter and which market offers "best execution" this month.
You asked for commentary on the feasibility and burden of the approach of adopting uniform statistical measures for execution quality. As was stated in the third paragraph of Proposed Rule 11 Ac1-5, "improved technologies for processing and disseminating information make it feasible to require disclosures," and I agree. The technology is available but should we not use that technology to create a market in which there is no need for concerns of best execution and order routing?
In closing, improving relations with investors (disclosure of order routing) and giving the industry more transparency (disclosure of execution practices) are both noble causes. But are they not temporary fixes to the permanent problem of multiple market places?