March 23, 2005
William H. Donaldson, Chairman
Securities & Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Proposed Regulation NMS (Reg NMS)
Release Number 34-50870;
File Number S7-10-04
Dear Chairman Donaldson:
The Security Traders Association (STA) appreciates the opportunities provided to us to participate in the discussions relating to market structure and the proposed Regulation NMS. We write to you again to urge the Commission to take a cautious approach before adopting dramatic changes to rules governing the structure of the U.S. equity markets.
In a recent hearing before the Senate Banking Committee you mentioned that the time for action on Regulation NMS is “now.”[1] Although we agree with the need to take timely action on the market structure issues that impact the quality and efficiency of the U.S. capital markets, we urge the Commission to take a cautious and pragmatic regulatory approach.
As articulated in our previous comment letters on proposed Regulation NMS, STA strongly recommends using a phased approach to help mitigate against unintended consequences. Such a solution would include requiring connectivity and access between market centers and participants, as well as implementation of other aspects included Regulation NMS, such as the proposals relating to access, access fees, and sub-penny quotations on locked and crossed markets.
STA has maintained that implementation of a fully connected market with auto-ex and auto-refresh will dramatically improve investors’ opportunity to achieve “best execution”. In addition, the NYSE hybrid offers a significant step in harmonizing with such a market. Fully implementing these changes would allow real time experience to dictate whether there is a need for further regulation.
There are other areas that we strongly urge the Commission to address if it proceeds to adopt Regulation NMS. Our view is that these changes to the current proposal are necessary to assure the quality of markets.
- Display of Manual Quotes in the NBBO – Regulation NMS proposes to allow manual quotes to be part of the NBBO. Although manual quotes are intended to be exempt from the protection of the proposed trade-through rule, the result under such a proposal will be investor confusion. Trust is reduced when an investor is unable to execute at posted prices. It is unclear what public policy goal can be furthered by including manual quotes in the NBBO. Ironically, these manual quotes may be the source of locked and crossed markets, which the Commission has proposed to eliminate.
- Access fees for “Protected” Quotations – The proposed access fee limitation is structured in a way that would only apply to quotations that are “protected” or required to be accessed by the trade-through rule. Therefore, the access fee limitation would not apply to depth-of-book or other quotations not protected by a trade-through rule. Although we agree that access fees should be limited to promote fairer and more efficient markets, placing a limit on access fees for only some of the quotations will only serve to create the unintended and to frustrate solving the problems the Commission has identified. Instead, applying a cap on access fees for all quotations would create consistent treatment and fair markets.
The STA knows that the decisions taken on Reg NMS will directly impact all investors. It is their interests which must be protected and their investments which must be secure. Because of this investor impact, we believe our overall phased approach continues to merit consideration. We also urge that the ideas articulated in this letter be reviewed.
Further, when finalized, Regulation NMS will have a lengthy implementation period. STA urges the Commission to form a “user group” that can assist the Division of Market Regulation in dealing with technical issues that, no doubt, will arise. STA offers its resources and would be pleased to be active in such a process.
On behalf of our 6,000 members we appreciate the dialogue of the past year and thank the Commission for its openness throughout the comment period.
Sincerely,
James A. Duncan John C. Giesea
Chairman President and CEO
Cc: The Honorable Paul S. Atkins
The Honorable Roel C. Campos
The Honorable Cynthia A. Glassman
The Honorable Harvey J. Goldschmid
Annette L. Nazareth, Director
Robert L.D. Colby, Deputy Director
Division of Market Regulation
[1] Testimony of William H. Donaldson, Chairman, U.S. Securities and Exchange Commission, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, March 9, 2005, pg. 3.