[12917]
December 7, 2000
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 61-00
SEC RULES COMMITTEE No. 130-00
RE: INSTITUTE COMMENT LETTER ON AMENDMENT NO. 8 TO SUPERMONTAGE
PROPOSAL
The Institute has filed a comment letter (attached) with the Securities and Exchange
Commission on Amendment No. 8 to Nasdaq’s SuperMontage proposal. The comment letter
reiterates the Institute’s support for the objectives of SuperMontage, in particular, increasing the
transparency of limit orders in the Nasdaq market and the ability of those orders to interact
with one another. The letter also states that the Institute is pleased that Nasdaq has proposed in
Amendment No. 8 changes intended to address several concerns of the Institute with prior
versions of SuperMontage. The letter states, however, that Amendment No. 8 introduces
additional changes to SuperMontage that, in the Institute’s view, would significantly diminish
the potential benefits of the proposed system including (1) the introduction of a new type of
order, the “preferenced order,” and (2) the introduction of a new execution algorithm for non-
directed orders that would be based on price/size/time priority.
Preferenced Orders
The comment letter states that the introduction of preferenced orders, which would
allow a market participant to designate a particular quoting market participant against which
its order is to be executed or delivered, is unnecessary and would offer little, if any, benefits to
the proposed SuperMontage system. In particular, the letter states that allowing market
participants to send preferenced orders inside the SuperMontage system would undermine the
concept of price/time priority by allowing market participants to preference market
participants that lack priority status, and thus damage the integrity of the Nasdaq market. In
addition, it is likely that such orders could be used as a mechanism to facilitate such practices as
internalization and payment for order flow. The Institute therefore strongly recommends that
preferenced orders be eliminated from the proposed SuperMontage system.
Price/Size/Time Priority
The comment letter states that while the Institute supports the two algorithms that
follow price/time priority (because they would resolve the dispute over how to treat ECN
access fees within SuperMontage while maintaining adherence to the principle of price/time
2priority), nothing compels the introduction of a third alternative based on price/size/time. The
Institute believes that, like preferenced orders, the price/size alternative is seriously flawed
because it would undermine the concept of price/time priority. In addition, ranking
orders/quotes based on displayed size will have little effect on the ability of market participants
to complete large orders as market participants will still have the ability to sweep through a
certain price level under the two remaining algorithms as well as have the option to utilize
directed orders to send an order to a market participant displaying greater size. The Institute
therefore recommends that the price/size option be eliminated from the proposed
SuperMontage system.
Other Comments
The comment letter reiterates the Institute’s earlier comments on the proposal that
further enhancements to SuperMontage that would increase the number of price levels
displayed in the system, particularly after the conversion to decimalization is completed, should
be pursued. In addition, the letter reiterates the Institute’s opposition to the “built-in”
internalization capability of the proposed system, which would be preserved in all three of the
proposed execution algorithms under Amendment No. 8. Finally, the letter states that the
Institute is pleased that Nasdaq is proposing certain clarifying amendments in Amendment No.
8 regarding UTP exchanges and encourages Nasdaq to continue working with market
participants to develop an approach that would treat UTP exchanges in a mutually satisfactory
manner.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)