From: Ricker Jeffrey [jr@mcm.com] Sent: Thursday, May 13, 2004 4:37 PM To: rule-comments@sec.gov Subject: Subject: S7-10-04, Release No. 34-49325 Comments By E-Mail Date: May 13, 2004 To: rule-comments@sec.gov From: Jeffrey P. Ricker, CFA Subject: S7-10-04, Release No. 34-49325 Comments Dear Sir: I submit the following comment as a user of our nation's stock markets as an investor and a consultant to institutional investors representing investments of USD $120 Billion. The Proposal basically seeks a methodology to ensure fairness in executing stock transactions in our nations increasingly disparate stock markets. There have been a number of electronic markets ("ECN") now collecting and executing stock orders. These markets work in electronic time, you see an order, you push a button and you are done. NASDAQ has more or less become an ECN. The AMEX is so tiny to become irrelevant. The New York Stock Exchange ("NYSE") has automated most order entry all the way up to the point of sale, but has adamantly not automated the point of sale, which is controlled by the specialist. If you aggregate all the orders for a given stock on these different markets you get an NBBO, the aggregate best bid and offer for the stock. On the ECNs, due to the instant automatic order filling, what you see is what you get: "WYSIWYG". So if an ECN has your desired side of the NBBO, you have a near certain chance of getting your order filled at that price, unless someone so happens to hit the button just before you do. With a computer managing the order book, anonymity, and strict price and time priority are assured. You can not cheat a computer. WYSIWYG does not apply to the NYSE. The specialist can hold your order for 30 seconds before filling it. The 30 second delay is supposed to allow for the possibility of "price improvement". As Martha Stewart would say, a better price is a "good thing". However, things can go bad, very bad, in 30 seconds. The NBBO can change in that time frame with your order unfilled. There may be hidden orders cutting in front of your order. Three thousand people work the floor of the NYSE. Among them are a thousand or more floor brokers, each of them wearing cordless headsets with hedge funds on the line. Floor brokers anxiously lean over into the specialists booths barking "whaddyagot" cherry picking the order flow. Arcane NYSE rules permit from floor brokers to do "matches from the floor" so they can jump in the middle of the order book usurping any semblance of price and time priority. When your order hits the NYSE floor, leaning deep into the specialist booth is floor broker Fred, barking "whaddyagot", who has traded stock with his friend specialist Ted all his career, and vacations every August in the East Hamptons with Ted's family, and no computer to keep the point of sale honest, who do you think is get the best deal? Fred and Ted, or you? There has been much kerfuffle and a nine digit fine against specialists front running the public. However, floor brokers continue to front run with impunity. I anxiously await for a floor broker scandal to break. So thanks to mostly to the floor brokers there is no WYSIWYG, no assured NBBO in the NYSE. How they maintain market share is a mystery. 'Tis a pity, it would make a terrific theme restaurant. One wag nicknamed it the "Neanderfloor". OK, how do you integrate the NYSE and the ECNs? The analogy is: How do you build a highway to accommodate traditional horse drawn buggys together with the newfangled fast moving automobiles? The Proposal suggests a convoluted "opt-out" election by which the investor effectively says "Ok, I'm willing to suffer the idiosyncrasies of the NYSE even if I don't get the NBBO". The "opt out" rule is like those big orange triangles stuck on the back of Amish horse buggys plodding along the highway. So here's an idea that lets the NYSE live for the moment and assures the investor the NBBO on the NYSE. Fairness is achieved between the NYSE and the ECNs. All markets are WYSIWYG. When an order hits the NYSE that is partially or totally marketable at the NBBO, the specialist is required to "stop" the fillable part of the order at that price and size. The stop guarantees the investor the NBBO so the NYSE NBBO is truly WYSIWYG. Then the specialist is welcome to wait another 30 seconds for a "price improvement" opportunity for the investor. No matter what happens the investor is never worse off for the 30 second wait. Computer matching of order flow and the order book will be needed to keep the specialist honest. With a stop rule, you can ride the highway in the horse buggy, but you will be assured of the same result as an automobile. No "opt out" orange triangle is needed. Furthermore, a stop rule will ensure that floor brokers can not front run the investor without at least paying a higher price. Somehow, sometime, the SEC or somebody has to blow the whistle on these parasites but that is not the scope of the current Proposal. The SEC has been instrumental in improving our nations stock markets over the past 8 years and there has been tremendous progress. Clearly there is more room for improvement and I appreciate the opportunity to contribute to that endeavor. Sincerely, Jeffrey P. Ricker, CFA 1912 Filbert Street San Francisco, CA 94123 (415) 441-4101 jr@mcm.com The information contained in this e-mail may be confidential and is intended solely for the use of the named addressee. Access, copying or re-use of the e-mail or any information contained therein by any other person is not authorized. If you are not the intended recipient please notify us immediately by returning the e-mail to the originator.(B)