Sent: Tuesday, June 25, 2002 8:02 PM
Subject: SR - NASD - 2002 - 90 Alternative Display Facility Comments

William Joseph
300 Piedmont Avenue
Austin, TX 78757

June 25, 2002

Mr. Jonathan Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

SR-NASD-2001-90; Letter Commenting on my research into the Alternative 
Display Facility proposed by the NASD

Dear Mr. Katz,

As a graduate student at the University of Texas, I have been asked to 
research the market implications of the Proposed Alternative Display 
Facility. As such, I have concentrated on three issues that seem to be of 
concern to the general marketplace as well as of concern to those in the 
securities business according to previous comment letters. There are many 
issues in question here, but I will address only three: 1) the NASD and the 
NASDAQ are not separate entities; 2) the treatment of Electronic 
Communications Networks due to access fees; and 3) market data sharing under 
the ADF proposal.

Firstly, the SEC has asked that if the Nasdaq wants to become an exchange, 
that they separate the functions of its marketplace from those of its 
regulator, the NASD-R and its affiliate, the NASD. While these entities have 
gone to great pains to separate themselves from each other, the 
preponderance of the evidence shows that they operate inter-dependently, not 
independently, of each other. Since today, the NASD and the Nasdaq operate 
together, there is certainly no evidence to show that they are making 
separate business decisions. As evidenced by the ADF proposal, the NASD is 
making little effort to market itself as a feasible alternative facility, 
but is rather perfunctorily setting up this mechanism to appease the 
Nasdaq's compliance with the Commission's mandate that the ADF itself is 
created. The pricing and contractual provisions and requirements in the ADF 
forwarded by the NASD to its members are not indicative of an entity that is 
trying to compete with another, but rather of one that is attempting to help 
the other thrive by pricing itself above what the market bears for similar 
services, and by demanding that its members join its alternative with no 
clear view of how it will do business. The Member firms that I have 
questioned who are choosing to delay joining the ADF because of this 
ambiguity are being penalized, and threatened that if they do not join the 
ADF now, that it will be many months or years before they will be able to 
participate.

Secondly, ECNs being treated differently in both SuperMontage (which has 
forced the creation of the ADF) and therefore in the ADF, because they 
charge access fees when SuperMontage itself charges access fees? According 
the the SuperMontage proposal, those participants who charge access fees for 
execution against their publicly-displayed quotations, as the ECNs do today, 
will be placed at the bottom of the Supermontage sort order, regardless of 
the time priority of their orders, simply because they charge an access fee. 
However, this is highly discriminatory since SuperMontage itself charges 
access fees. This is clear evidence that the Nasdaq is trying to utilize its 
position as the only real alternative for OTC stocks to create its own ECN 
at the expense of some of its own members, including the ECNs themselves. If 
the Nasdaq will discriminate against access fees, then it simply cannot be 
allowed to treat itself differently and unfairly, if it will also charge 
access fees. This violates NASD and SEC rules for a fair and orderly 
marketplace.

Finally, the market data sharing provisions that are via competitive 
pressures, going back to the participants that help create that market data, 
are not addressed in the ADF. This points back to the first point of this 
research herein, in that because of the lack of revenue sent back to 
participants in the ADF, the NASD will drive participation away from the ADF 
and back to another alternative, presumably the SuperMontage itself since 
there are no other viable display and execution mechanisms in place today.

In summary, the ADF proposal as researched falls short as an alternative to 
the fair and orderly marketplace that exists today. This is certainly true 
when compared to execution venues such as the New York Stock Exchange, the 
Nasdaq Stock Market, and some of the other exchanges that exist today. In 
contrast with the ADF proposal submitted by the Nasdaq, all have addressed 
the above issues in regulatory and competitive form.

Sincerely,

William Joseph