Jonathon Katz Division of Market Regulation SEC 450 Fifth Street, NW Washington, DC 20549-1001 Bruce Duncan 1785 Princeton Avenue Salt Lake City, UT 84108 July 14, 2004 RE: S7-10-04 Third Market-Trade Throughs of Listed Securities and the Trade Through Rule Most Closed-End Funds (CEFs) are exchange-traded stocks owned and traded by individual investors. With a few exceptions, they are illiquid. When I see a trade outside the quote I ask myself: Was this trade at a fair price? Are individual investors being cheated when these listed securities are traded on a market (usually NASD) at prices well outside the national bbo WHEN there is adequate quote depth on another market (usually the NYSE)? Example: Here is such a trade from 6/21/04. The attached data (at bottom) is the 6/21/04 trade and quote time series for MUI. Data is from Townsend Analytics’ RealTick PC program and datafeed. The Market: The MUI day low was $12.67 at 12:40:00 pm. The Limit Order Bid Queue: I was bidding for 1800 shares at 12.66 on the NYSE, an order which I entered at 09:37:42 am. There was another 2500 shares bid at 12.66 and there was a very large size bid at 12.65, for 60,000 shares - I think. Thus the specialist order book was quite deep on the bid side. The NYSE Best Bid @ $12.50 at 14:43:33 was wrong because it did not represent the actual market. The Trade: The questionable trade was at 14:43:42 on 6/21/04 -- 7800 MUI shares @ $12.50 on NASD. This trade was sandwiched between two 12.67 NYSE executions in a 5 second window. End of Day: My bid for 1800 MUI @ $12.66 traded 3 minutes later, at 14:46:45 pm, part of a 4000 share lot. Except for the single MUI print at $12.50, the day low was $12.66. The Volume was 88,700 shares. The VWAP was $12.6808. Was anyone cheated? 1. Was I cheated? Indirectly. I was happy to buy MUI at the best bid, $12.66. Of course, I would have been happier to pay less, $12.50 for example, but that wasn’t the fair market price. And that price was not available to me. 2. Was the seller of the 7800 MUI shares at $12.50 cheated? I think so. He netted $1248 (= 7800 x 0.16) less than he could have received from a NYSE trade - because his order was executed at an inferior price by a dealer, rather than at the market location of the true best bid, the NYSE. I and others in the NYSE bid queue would have paid $12.65 or better for all 7800 shares. In the absence of special circumstances - the seller was cheated! 3. Was the NYSE specialist bid at $12.50 for 100 shares at 12.43:33 pm part of the problem? Probably; I don't know enough about specialist behavior to judge. Was the quote illegal? The incorrect specialist bid was certainly bad practice. Maybe, because of the fast, highly-automated NMS/ITS communications system, the incorrect specialist bid triggered a sell order held by a broker-dealer? Question: Was the Dealer who bought the 7800 MUI shares at $12.50 also the seller of the shares I purchased at $12.66 seconds later? Did the Dealer flip the shares? I don’t know. If so, did the Dealer cheat his customer by failing to use best efforts to obtain best execution? I know that a broker-dealer who trades listed securities is subject to the trade-through rule when he makes a market for a listed security on the NASD. However, I frequently see trades like the one described here. Is there something wrong with this picture of how things really work? The trade-through rule is controversial and up for revision. The arguments for/against the trade-through rule focus on large size orders for very liquid securities. Is anyone thinking about illiquid securities? There are times when the trade-through rule should apply to all NASD dealers; the above trade is a good example. Since there was adequate quote depth on the primary market; MUI should not have traded 1% outside the national bbo. It’s not a huge amount of money - unless you are the seller who got the inferior price. Sincerely yours, Bruce K. Duncan ============================================================= MUI Trade & Quote Time Series for 6/21/04 MUI Date Time Price Volume Exch Type Bid BSize BEx Ask ASize AEx Cond 6/21/2004 14:38:54 Best Bid 12.70 3100 N 12.74 200 N 6/21/2004 14:38:54 Best Ask 12.70 3100 N 12.73 5000 T 6/21/2004 14:38:56 Bid 12.71 400 N 12.73 5000 T 6/21/2004 14:38:56 Ask 12.71 400 N 12.74 200 N 6/21/2004 14:38:56 Best Bid 12.71 400 N 12.74 200 N 6/21/2004 14:38:56 Best Ask 12.71 400 N 12.73 5000 T 6/21/2004 14:41:01 Bid 12.71 400 N 12.73 5000 T 6/21/2004 14:41:01 Ask 12.71 400 N 12.75 2500 N 6/21/2004 14:41:02 Bid 12.71 400 N 12.75 2500 N 6/21/2004 14:41:02 Ask 12.71 400 N 12.74 200 N 6/21/2004 14:41:10 Bid 12.71 400 N 12.74 200 N 6/21/2004 14:41:10 Ask 12.71 400 N 12.74 600 N 6/21/2004 14:43:28 Bid 12.71 100 N 12.74 600 N 6/21/2004 14:43:28 Ask 12.71 100 N 12.74 600 N 6/21/2004 14:43:28 Best Bid 12.71 100 N 12.74 600 N 6/21/2004 14:43:28 Best Ask 12.71 100 N 12.73 5000 T 6/21/2004 14:43:28 12.71 400 N Trade 6/21/2004 14:43:29 Bid 12.71 100 N 12.73 5000 T 6/21/2004 14:43:29 Ask 12.71 100 N 12.74 200 N 6/21/2004 14:43:33 Bid 12.50 100 N 12.74 200 N 6/21/2004 14:43:33 Ask 12.50 100 N 12.74 600 N 6/21/2004 14:43:33 Best Bid 12.50 100 N 12.74 600 N 6/21/2004 14:43:33 Best Ask 12.50 100 N 12.73 5000 T 6/21/2004 14:43:36 12.70 3100 N Trade 6/21/2004 14:43:38 12.67 2000 N Trade 6/21/2004 14:43:42 12.50 7800 T Trade 6/21/2004 14:43:43 Bid 12.50 100 N 12.73 5000 T 6/21/2004 14:43:43 Ask 12.50 100 N 12.73 500 N 6/21/2004 14:43:43 12.67 3500 N Trade 6/21/2004 14:43:44 Bid 12.66 4300 N 12.73 500 N 6/21/2004 14:43:44 Ask 12.66 4300 N 12.73 500 N 6/21/2004 14:43:44 Best Bid 12.66 4300 N 12.73 500 N 6/21/2004 14:43:44 Best Ask 12.66 4300 N 12.73 5000 T 6/21/2004 14:43:53 Bid 12.67 100 P 12.73 5000 T 6/21/2004 14:43:53 Ask 12.67 100 P 25.44 100 P 6/21/2004 14:43:53 Best Bid 12.67 100 P 25.44 100 P 6/21/2004 14:43:53 Best Ask 12.67 100 P 12.73 5000 T 6/21/2004 14:43:59 Bid 12.66 4300 N 12.73 5000 T 6/21/2004 14:43:59 Ask 12.66 4300 N 12.72 500 N 6/21/2004 14:43:59 Best Bid 12.67 100 P 12.72 500 N 6/21/2004 14:43:59 Best Ask 12.67 100 P 12.72 500 N 6/21/2004 14:44:00 Bid 12.42 800 T 12.72 500 N 6/21/2004 14:44:00 Ask 12.42 800 T 12.70 2200 T 6/21/2004 14:44:00 Best Bid 12.67 100 P 12.70 2200 T 6/21/2004 14:44:00 Best Ask 12.67 100 P 12.70 2200 T 6/21/2004 14:44:01 Bid .01 100 P 12.70 2200 T 6/21/2004 14:44:01 Ask .01 100 P 25.44 100 P 6/21/2004 14:44:01 Best Bid 12.66 4300 N 25.44 100 P 6/21/2004 14:44:01 Best Ask 12.66 4300 N 12.70 2200 T 6/21/2004 14:44:01 Bid 12.67 300 N 12.70 2200 T 6/21/2004 14:44:01 Ask 12.67 300 N 12.72 500 N 6/21/2004 14:44:01 Best Bid 12.67 300 N 12.72 500 N 6/21/2004 14:44:01 Best Ask 12.67 300 N 12.70 2200 T 6/21/2004 14:44:58 Bid 12.67 400 N 12.70 2200 T 6/21/2004 14:44:58 Ask 12.67 400 N 12.72 500 N 6/21/2004 14:44:58 Best Bid 12.67 400 N 12.72 500 N 6/21/2004 14:44:58 Best Ask 12.67 400 N 12.70 2200 T 6/21/2004 14:45:00 Bid 12.67 400 N 12.70 2200 T 6/21/2004 14:45:00 Ask 12.67 400 N 12.71 200 N 6/21/2004 14:45:23 Bid 12.40 400 P 12.71 200 N 6/21/2004 14:45:23 Ask 12.40 400 P 25.44 100 P 6/21/2004 14:45:27 Bid 12.66 4300 N 25.44 100 P 6/21/2004 14:45:27 Ask 12.66 4300 N 12.71 200 N 6/21/2004 14:45:27 Best Bid 12.66 4300 N 12.71 200 N 6/21/2004 14:45:27 Best Ask 12.66 4300 N 12.70 2200 T 6/21/2004 14:45:27 12.67 400 N Trade 6/21/2004 14:46:27 Bid 12.40 400 P 12.70 2200 T 6/21/2004 14:46:27 Ask 12.40 400 P 12.92 400 P 6/21/2004 14:46:41 Bid 12.42 800 T 12.92 400 P 6/21/2004 14:46:41 Ask 12.42 800 T 12.73 5000 T 6/21/2004 14:46:41 Best Bid 12.66 4300 N 12.73 5000 T 6/21/2004 14:46:41 Best Ask 12.66 4300 N 12.71 200 N 6/21/2004 14:46:45 Best Bid 12.66 300 N 12.71 200 N 6/21/2004 14:46:45 Best Ask 12.66 300 N 12.71 200 N 6/21/2004 14:46:45 12.66 4000 N Trade 6/21/2004 14:49:31 Best Bid 12.66 300 N 12.71 200 N