December 16, 2004
Jonathan G. Katz, Secretary
Securities Exchange Commission
450 Fifth Street
Washington, DC 20549-0609
Dear Mr. Katz,
I know I have been very active lately with comments regarding the new Regulation NMS proposals that the SEC is scheduled to vote on in early 2005. I have just become so compelled to do so based on the fact that the government feels they have the right to make the choices I feel are my own to make. As a trader, I actively trade for my personal account, as well as for hedge funds that need orders into the market on a moments notice. On Wednesday December 15th 2004, I listened to the web cast of the SEC meeting. I found myself very frustrated with several areas of the meeting. I realize that every side of this argument is going to represent their personal best interests and that the commission has to look through all of those actions in order to find the clear path. For the record, my only "best interest" regarding this matter are that I feel I have the right to choose to some degree where and how I want to trade in the Nasdaq and NYSE marketplaces. I respect and understand that the SEC and its staff have spent countess months trying to gather information and understand the entire picture regarding market structure. Beyond all of the data collected and all of research reports that have been generated, I ask this question: How many committee members and SEC staff members have actually traded equities for a living? How many members have actually experienced a true fast market while trading their own personal capital? I may stand corrected, but for some reason I feel that most SEC member’s actual trading experiences consist of either web-based browser trading through a retail broker or a simple phone call to their personal broker requesting the buying or selling of securities. For others, I feel it may consist of simply looking at quarterly account statements. Now I realize that you are all very intelligent people so please excuse some of my generalizations. It’s just got that impression while listening to some of the committee and staff members who presented at that meeting. And truth be told: Those feelings make me uneasy when those very people are in a place where they can make such drastic and sweeping decisions. I know the SEC wants to make the right decisions for the investor. I just feel that a lot of members are not fully understanding the picture while at the same time trying to push though such drastic changes.
Why does this bother me as a trader? I trade for a living and I fight everyday for my clients. Every client is different and I base my trading decisions on that specified need. For me, speed and accuracy make the difference between success and failure. In other situations, best price suit me just fine. Here is an example of my average execution times to various market centers. Note: "Round Trip" is defined as:
"Send" message: This is the initial timestamp of the order placed. "Ack" message: This is the acknowledgement from the market center stating that my order was received. "Fill, Cancel, Reject": The final message from the market center.
The Market Centers and execution times:
| INET ECN: | 5 Milliseconds round trip |
| Arcaex ECN: | 150 Milliseconds round trip |
| Brut ECN: | 35 Milliseconds round trip |
| Supermontage: | 400 Milliseconds round trip |
| NYSE: | 30-45 Seconds |
(Note: 1000 Milliseconds equals 1 second). To me, that is an eternity and the difference between success and failure in today’s market place. Also note: The more "proactive" a market center is, the more lag that is incurred during execution. I monitor and record these average executions on a daily basis through my Order Management Systems. I use this information to stay informed and in tune with current markets. This information is vital in the decision making process. Slowing down execution speeds due to a depth of book "trade through" sweep rule will not be a step forward in today’s markets where competition is driving down execution costs.
Stale quotes:
I am not sure if members of the committee realize when a quote is considered "stale" in the marketplace. This is not related to "flickering" quotations, where an automated system sends out a limit order to the book and immediately cancels that order in milliseconds. What I am referring to regarding "stale" quotations is the actual lag between market centers due to their physical locations across the country. These are quotes that actually do not exist for execution based on data lag. No matter how much you upgrade existing technologies and infrastructure, you can and will not reduce the entire market data lag between these centers. In order for there to be a level playing field regarding this Central Limit Order Book style proposal, all players need equal access to this data with regards to network and location lag. This is a major issue based on the fact that the "depth of book" trade through proposal would require every market center to link to the others so that decisions can then be made as to what is perceived as "best price" in the market place. In a very fast moving market on a stock - specific level, every market center, based on this proposed rule, will be forced to scan and attempt to lock in a quote which resides on a different market center for the execution. In a fast moving market, the reality is that the quote which is locked in for execution is really a "stale" quote that lasted 5 milliseconds on the book. Once you add in the lag of actual execution from that other datacenter, the order was never attainable to begin with. This leaves the investor / trader with a stale and unfilled order. Basically, the trader/investor is at the mercy of the CLOB (Central Limit Order Book) style system. Until this commission has experienced these issues first hand, I doubt they can fully understand the severity of this issue and the ultimate implications if a full-blown CLOB style system if passed. Believing that newer technology will ultimately fix this issue is almost delusional in my opinion. As a trader, I am in favor of investor protection and am also not afraid of the "unknown" regarding market regulation changes. I realize that not everybody involved regarding Regulation NMS can and will be satisfied. I have a very hard time believing that the government has the right to make all of these decisions for me. I would believe more in that direction if I felt the issue was better understood and not on a "research and numbers" level, but on more of a "micro market structure" and "real world" trading level.
Thank you once again for your time,
Michael Dilios
Trader