The Security Traders Association of New York, Inc.
Jonathan G. Katz
Re: File No. SR-NASD-2003-128
Dear Mr. Katz:
The Security Traders Association of New York ("STANY")1 submits this letter in response to the above captioned release filed by the National Association of Security Dealers, Inc. ("NASD"). Speaking on behalf of the majority of our membership2, with one qualification, we applaud and support NASD's proposed amendments to NASD Rules 4623 and 4710 to establish a maximum level of quote/order access fee for Electronic Communications Networks (" ECNs") that elect to participate in Nasdaq's National Market Execution System ("NNMS" or "SuperMontage").
STANY commends the NASD's efforts toward fashioning a potential resolution to the deleterious effects the charging of access fees by ECNs has had on the market. The limitation of the access fee chargeable by ECNs is a step in the right direction toward a more equitable market system. We endorse the proposed rule change in so far as it limits access fees for ECN participants in SuperMontage. However, as an organization committed to improving the financial markets, we are concerned that this change does not go far enough. As described below and consistent with previous statements to the NASD on this issue, STANY believes that the appropriate and fair resolution to this issue is the complete abolishment of ECN access fees.
In the above referenced proposed rule change, Nasdaq proposes to amend NASD Marketplace Rules 4623 and 4710 to: (1) establish a maximum level of quote/order access fees for Electronic Communications Networks ("ECNs") that elect to participate in Nasdaq's National Market Execution System ("SuperMontage"); (2) eliminate SuperMontage's Price/Time with access fee consideration execution algorithm; and (3) eliminate SuperMontage's Price/Size execution algorithm.
Specifically, Nasdaq has determined to establish, as explicitly permitted by Rule 301(b)(4) of Regulation ATS, a maximum permissible quote/order access fee amount of $0.003 (three mils) per share for ECNs that elect to participate and execute transactions in the SuperMontage system, an amount equal to the execution fee Nasdaq currently imposes on parties automatically executing against quotes/orders through SuperMontage and, in Nasdaq's belief equal to the level of access fees imposed by most ECNs today. ECNs that desire to charge more than the $0.003 maximum amount for access to its quote/orders will not be permitted to post liquidity in SuperMontage as an NNMS ECN, however, they will be permitted to continue to participate in SuperMontage as NNMS Order Entry Firm.
Nasdaq believes that the establishment of this maximum access fee makes unnecessary the Price/Time with fee consideration execution algorithm currently available in SuperMontage and seeks to eliminate it. Nasdaq has also proposed to eliminate SuperMontage's Price/Size execution algorithm because it is used in less than 7% of orders on SuperMontage and will reduce system complexity.
As the SEC is aware, certain broker-dealers that operate Alternative Trading Systems known as Electronic Communication Networks ("ECNs") charge non-subscribing market-participants fees for interacting with their quotes displayed on Nasdaq. Market-participants must pay these fees, which are often times greater than comparable market center execution fees or risk being denied access to ECN quotes displayed on the Nasdaq Montage, thus jeopardizing their ability to satisfy their best execution responsibilities. In 1996 and 1997, the Commission authorized ECNs to charge non-subscriber fees in the Adopting Release for the Order Handling Rules (the "Adopting Release")3. However, upon close examination of the Adopting Release we have been unable to find a formal discussion of these fees. ECNs were permitted by the Commission to charge fees for accessing their systems that were similar to the communications and systems charges imposed by other markets so long as those access fees were not structured to discourage access by non-subscriber broker-dealers. The SEC granted no-action relief to ECNs based, in part, on representations by the ECNs that they would charge non-subscribers fees no greater than the fees charged their active broker-dealers subscribers, and in no event more than $0.015 per share (the most current SEC mandate has revised this to $0.009 per share)4. Although decimalization of the markets has given rise to reduced spreads and has caused market makers to change their business models to execute retail and sometime institutional orders in the same manner as ECNs, the Commission has steadfastly prohibited, based on its interpretation of Rule 11Ac1-1 (the "Quote Rule"), market makers from charging similar fees. This difference in treatment has created an un-level playing field and a regulatory imbalance that raises market transparency, firm quote and best execution concerns that have yet to be addressed.
STANY commends the NASD for its efforts toward finally addressing and attempting to resolve the knotty market structure issue created by allowing ECNs to charge assess fees that other liquidity providers are not permitted to charge. The NASD's proposal does not, however, go far enough. ECN access fees present a hidden cost to accessing ECN quotations and because these fees are not reflected in the ECN's published quotation, such quotations do not reflect the true price available at an ECN. Such hidden costs make it difficult for traders to access and meet their best execution obligations. Likewise, hidden fees cause the market to be distorted and create a lack of market transparency. The captioned proposal may reduce, but will not eliminate, these harmful effects. Anything other than the abolition of such fees will result in the markets operating in a manner inconsistent with the National Market System.
STANY supports the NASD's attempt to address the injurious effects ECN access fees have had on the marketplace. However, the NASD's proposal does not go far enough towards rectifying the negative impact of these fees. STANY believes that the NASD's proposal provides the SEC and the marketplace the opportunity to review the unwelcome and injurious results the imposition of these fees cause in the context of today's marketplace rather than the marketplace of 1996-1997 when such fees were initially permitted. We believe that such an analysis will inevitably lead to the conclusion, as STANY and its parent STA have consistently argued, that such fees be eliminated.