January 16, 2005
Key principles of proposed regulation NMS include transparency of quote information, best execution, protection of limit orders, and efficient pricing.It is important for market integrity that limit orders outside the NBBO be exposed to to market participants. With that information, market participants can judge how to execute their orders consistent with their best execution obligations. Rather than imposing a model under the alternative display formula, the current requirement of trading with the NBBO is consistent with the 1975 legislation that set forth a model based on competition.
Automatic execution of orders should not permit short selling orders that would successively trade with lower bids. While the Commission has delayed the short selling pilot until June 30, 2005, the absence of short selling regulation combined with automatic execution creates the possibility in a severely distressed market environment of a market disaster. If automated short selling at successively lower prices is permitted, there is no policy reason that would deny such executions to manual orders. Enforcement actions after the fact would not restore the loss of confidence created by such activity whether it was manipulative or not.
The Commission apparently continues to regard payment for limit order flow as a legitimate incentive rather than corporate bribery which would otherwise violate state law. If payment for liquidity providers is to continue, the appropriate regulatory action is to require that such payments flow thru to the customer rather than remain with the broker-dealer. The current situation is one of conversion of customer assets which is intolerable and never should have been permitted under any rationale.
Proposed Rule NMS is a major step in the right direction reflecting both improved technologies and the desire to effect customer savings in an environment of increased competition among markets. The Commission and its staff are to be congratulated for their careful analysis of the difficult issues that a major change of the national market structure entails.