From: josh [josh@josh.com]
Sent: Wednesday, December 05, 2001 3:18 PM
To: rule-comments@sec.gov
Cc: cameron@isld.com; matt@isld.com; ed@datek.com
Subject: Comment on SR-NASD-2001-66

Release No. 34-45016
File No. SR-NASD-2001-66

Commenting on NASD rule change to reduce minimum displayed size to 100
shares

INTRODUCTION

With the implementation of SuperSOES, market maker quotes on NASDAQ are
now as firm as, if not more firm than, ECN quotes that are accessible
through SelectNet. The full size of every market maker quote is liable
for instant and automatic execution against an incoming SOES order.
This new firmness of market maker quotes obviates all existing rules
designed to hamper quote "gaming" by market makers.

These "anti-gaming" rules now do nothing more than put market maker
quotes at a competitive disadvantage vis-a-vis market participants
without such restrictions. While originally intended to enhance market
quality, these rules now perversely inhibit liquidity and reduce market
quality. All these rules must be re-examined in light of new
circumstances and eliminated. The 1,000 share minimum display size for
market maker reserve is one such rule.

THE INVISIBLE CHOICE

Proponents of the 1,000 share minimum display size for reserve orders
claim that it forces market makers to display larger size to the
marketplace. In fact, the opposite it true. The argument assumes that if
you restrict a market maker from entering his full intent with a 100
share displayed size, then he will enter it with a 1,000 share displayed
size instead. In fact, this assumption ignores several more attractive
options available to a market maker in this situation.

Instead, the market maker can either

(1) withhold his intention to trade from the marketplace entirely and
wait until the order becomes marketable to execute it,

(2) forgo the NASDAQ reserve feature and enter only the number of shares
he wishes to display into the marketplace and then manually "refresh"
his quote each time the displayed portion is executed, or

(3) enter his order into an approved display alternative ATS that is not
subject to the 1,000 share restriction.

Each of these alternatives legally defeats any purported benefits of the
1,000 share minimum rule. Each one also has a negative impact on market
quality when compared to permitting the market maker use his reserve
quote directly.

Completely withholding intent to trade (1) is probably the easiest and
most frequently chosen alternative. It is also the most damaging. It
increases short-term volatility by converting a liquidity-adding
non-marketable order into a liquidity-removing marketable order. It also
widens spreads in cases where the market maker was willing to trade a
price superior to the inside market.

The "synthetic" reserve size alterative (2) is only practical for
technologically sophisticated firms who can automate the function. It
increases volatility because incoming SOES orders are able to trade
though the latent reserve size. It can also increase quotation traffic
as the market maker's quote is repeatedly executed through and then
refreshed back to its original price. With NASDAQ's new per-quote update
fees, this alternative can also increase costs.

The ATS alternative (3) can increase trading costs for the market maker
by way of fees or lost market data revenue. It is also fundamentally
unfair force a market participant to depend on a potential competitor
due to an artificial regulatory disparity between the two participants.
Arbitrary regulatory inconsistency also tends to undermine the
credibility of the regulator.

CONCLUSION

The current 1,000 share minimum display size for Market Maker reserve
quotes is a historical artifact that no longer serves any useful
purpose. It is easily circumvented, unfair, and reduces market quality.

Market Makers should be free to enter any displayed or reserve size that
suits their trading intentions. Under SuperSOES, the minimum possible
quotation size of 100 shares sets a practical limit to the minimum
display size.

The pending rule change should be approved.

Joshua Levine
P.O. Box 362
New York, NY 10268