[11545]
January 11, 2000
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 2-00
SEC RULES COMMITTEE No. 7-00
RE: INSTITUTE COMMENT LETTER ON NASDAQ ORDER DISPLAY FACILITY
______________________________________________________________________________
The Institute has filed a comment letter (attached) with the Securities and Exchange
Commission in connection with the proposed rule change filed by the NASD to create a new facility for
the display of trading interest (the “Nasdaq Order Display Facility”) and to substantially modify the
proposed Nasdaq National Market System (“NNMS”).
In general, the comment letter states that the Institute supports the objectives of the proposal to
establish the Order Display Facility and to modify Nasdaq’s trading platforms. Nevertheless, the
Institute believes there are certain aspects of the proposal that require further examination before the
SEC approves the proposal. In particular, the Institute had specific comments on three parts of the
proposal.
Nasdaq Order Display Facility
The Institute’s letter noted that the Order Display Facility would display the three best price
levels in Nasdaq, as well as the aggregate size at each price level of the “displayed” trading interest of
market makers, electronic communication networks (“ECNs”), and Unlisted Trading Privilege (“UTP”)
Exchanges. The letter stated that given the recent volatility in the securities markets, combined with the
planned conversion from fractional pricing to decimal pricing, the Order Display Facility should instead
display the five best price levels in Nasdaq on both the bid and offer side of the market. Displaying five
price levels would provide investors with a greater indication of the interest in a particular security and
would allow investors to better gauge the market in general.
Five-Second Rule
Under the proposed order execution algorithm, after displayed and reserve size in Nasdaq is
exhausted at a certain price level and the Nasdaq system moves to the next price level, there would be a
five-second delay before the system would attempt to execute any orders at that time. The comment
letter states that it is unclear at this time what the ramifications of the proposed five-second delay would
be to the Nasdaq market and that before this feature becomes part of the Nasdaq market, we
recommend that Nasdaq further examine its impact, especially for the most actively traded securities
where investors need to respond quickly to a changing market environment.
Internalization
Under the proposed system, when a Nasdaq Quoting Market Participant is at the best bid/best
offer, Nasdaq would provide for internal matching of that participant’s orders against the participant's
quotes/order before the order is sent into the Nasdaq system to execute against all non-directed orders.
The Institute’s letter states that the internalization of orders can impede access to liquidity for market
participants and we therefore question the added benefit of this feature to the proposed Nasdaq system
and urge Nasdaq to re-examine this aspect of the proposal.
Ari Burstein
Assistant Counsel
Attachment