January 22, 2005
To: Honorable Members of the SEC: Re: NMS Rule implementation
Overview: I am writing to express concerns from the point of view of a single investor. I personally use full-service brokers which have included my brother and deceased father, and have many friends in the business. I also have a level II platform which I use to monitor investments and to do direct trades. I am concerned that the potential of this rule is to make it difficult if not impossible for both brokers and direct traders to execute orders in a timely fashion and therefore reduce their ability to get the current best price for their trades. Since I am risk averse and since this is a business from which I derive some family income I am doubly concerned.
Comments:
General: The following comments pertain to section III of the proposed rule change. The new proposed trade-through restriction in itself may expose traders to the best price. However, the myriad of exceptions, rules, or other requirements, that are suggested or included for comment that could be invoked by a broker or market, could potentially slow or prevent the execution of a trade, in such a manner that the best price may never be consummated and a far worse price forced on the trader. This could be true not only for direct traders but for brokered trades as well. For example the NYSE could post the highest bid, but using its 30 second rule could decline a trade where the bid went up, or execute a trade where the bid went down, leaving the trader at a loss compared to what he might have gotten through another broker. The opt-out rule could help but would deny the trader the opportunity of multiple markets and the proposed consent rules could slow the execution as well. Last your discussion of automated execution is filled with questions of potential rules that if implemented could allow a market to refuse, limit, delay or otherwise interfere with the execution and therefore the price. It is hard to imagine that the proposed rule in any form improves on the ability of investors to execute at a price at which they are comfortable. This applies both to the professional and the individual investor. In addition and perhaps the most dangerous result of this rule would be the probable use of computers by markets to manipulate the bid and ask to ensure the execution of orders through their own market.
Detail comments:
IIIC.7: Your rule proposal identifies the problem of execution but takes no action to guarantee it. In fact you discuss so many potential hidden rules that could result in a slow execution and anything but the best price. Simply - a market bid or offer should not be listed unless it is immediately executable. I see bids higher than offers or offers lower than bids that are never transacted. How can that be? If the bid or offer is shown it must be executable and within a few seconds and to the first bidder. There is no excuse for not executing. No excuse for this. Let me say it again - no excuse. That is not free market. Even our casinos do not go that far.
III D.1: The opt out rule creates a potential procedural issue of order by order consent that could limit the ability of direct or broker trades to execute quickly. The opt out rule should operate seamlessly and would best be done globally. Further the opt-out rule should be selective to include more than one ECN or broker. The opt-out trader should be allowed to take advantage of multiple markets such as ISLD, ARCA, NYSE. For example a trade of 1000 shares could be filled through several markets including NYSE, ARCA, INST. Why not?
III D.2: Your discussion of automatic execution asks for comment on a number of different rules that could allow markets to opt-out of a trade. These potential rules could result, once again - that the market offering the best price could ensure that a trade might never be executed - in effect locking up the traders money or forcing the trader to a worse price. Examples would be the limits on size of trade, or the time it can take to execute, or paperwork, or the existence of another best price, etc, etc. . You ask for comment: What should automatic execution be defined as?, and my comment is that the rules you make for automatic execution must not allow any market or ECN to opt out, delay execution of, or allow favoritism in the processing of an order. The only rule necessary is that Markets such as the NYSE, AMEX, ARCA, ISLD, etc. would have auditable fairness on a uniformly applied basis.
III F. : Unless the problems associated with delaying execution are eliminated the trade through prohibition will result in slower executions and worse pricing for the trader. Eliminating the opt-out program in favor of automatic execution is a bad idea unless the market is required to execute transactions without restriction as the ECNs already do.
Conclusion: Nowhere can I find discussion of, concern for, or methods to deal with the inevitable and unintended consequence of competition between markets to list the best price in order to assure they get the order. In reality, electronic trading centers may be forced to implement their own ability to set up dummy orders that can be rejected. This would be a big step backwards. Because of this and because the restriction on trade-through simply has no real benefit over what exists today, or that isnt dissuaged by other parts of the rule itself, I cannot support any part of it. Watching Level II for just a few minutes tells you the best price is a fleeting concept. Execution at your price is the important consideration for traders and brokers. Worse, there are, based on recent news reports, some 5 million active traders and many more than 5 million people who do some trading directly. These people who would be part of an ownership group to pluck a popular theme and represent a substantial expansion of our capital base, would be greatly disadvantaged. If these people are unable to make their trades at prices they have control over and are comfortable with, the rule would be doing an incredible disservice. And for what gain? To ascertain a trader sees the best price even though there is no guarantee he will get it? To protect the aging systems of the NYSE or AMEX? If we regulate to protect NYSE, AMEX, etc, then we should regulate to protect our maufacturing, airlines, telephones....This rule change has no base to stand on. It doesnt improve anything and has the potential of significant harm to our markets.
cc:
Honorable Christopher Dodd, US Senate
Honorable Joseph Lieberman, US Senate
Honorable Robert Simmons, US House of Representatives
Ronald J Berman, Bear Stearns
David Berger