[17722]
July 1, 2004
TO: SEC RULES MEMBERS No. 96-04
EQUITY MARKETS ADVISORY COMMITTEE No. 31-04
RE: INSTITUTE COMMENT LETTER ON SEC REGULATION NMS
The Institute has filed a comment letter with the Securities and Exchange Commission
on proposed Regulation NMS and the Commission’s supplemental request for comment on the
proposed rules.1 Regulation NMS contains four interrelated proposals – the trade-through
proposal, the market access proposal, the subpenny quoting proposal and the market data
proposal – which, collectively, are designed to modernize the regulatory structure of the U.S.
equity markets. The most significant aspects of the comment letter are summarized below and
a copy of the letter is attached.
I. Trade-Through Proposal
The proposed trade-through rule would require an order execution facility, national
securities exchange and national securities association market, with regard to the trading of
“NMS Stocks,” to establish, maintain, and enforce policies and procedures reasonably designed
to prevent the purchase or sale of an NMS Stock at a price that is inferior to a better price
displayed on another market. The letter supports the establishment of a uniform trade-through
rule for all market centers and states that such a rule would be a significant step forward in
providing protection for limit orders.
The letter also provides comments on several specific aspects of the proposed rule. Most
significantly:
• The letter supports the application of the proposed rule to: (1) all “NMS securities,”
including Nasdaq securities; (2) the account of a broker-dealer as well as the account of a
customer; and (3) the best displayed bid and offer of any order execution facility as well
as all other displayed limit orders or quotes that are also priced better than the order
being executed and are automatically accessible.
1Securities Exchange Act Release No. 49325 (February 26, 2004), 69 FR 11126 (March 9, 2004) (“ Proposing Release”)
and Securities Exchange Act Release No. 49749 (May 20, 2004), 69 FR 30142 (May 26, 2004) (“Supplemental Release”).
2
• The letter supports the proposed exception to the trade-through rule that permits an
“automated” market to trade through a better displayed bid or offer on a “non-
automated” market, but recommends that the Commission amend the proposed
definition of an “automated” market to: (1) establish minimum performance standards
with respect to what would be considered an “immediate” response to, and update of, a
quote and (2) require a market, in order to be considered an “automated” market, to
provide automatic execution to its entire limit order book and not only to its best bid
and offer.
• The letter supports the Commission examining whether to amend the trade-through
proposal to create an exception for “non-automated” or “manual” quotes (instead of
“non-automated” markets), as proposed in the Supplemental Release; however, the
letter recommends that the Commission delineate a clear definition of what would be
considered an “automated” quote, as well as the specific parameters for the operation of
a manual quote exception.
• The letter does not support the trade-through proposal’s “opt-out” exception, provided
that the Commission adopts an “automated” market or manual quote exception, as
amended by the Institute’s recommendations for those exceptions.
• The letter recommends that the Commission eliminate the proposed “trade-through
limit amount,” and permit an “automated” market (as defined under the Institute’s
recommendations) to trade through a “non-automated” market for an unlimited
amount, or, if the Commission creates a manual quote exception, permit a market
participant to trade through a manual quote for an unlimited amount.
II. Market Access Proposal
The letter supports the market access proposal, which would establish rules that would
modernize the terms of access to quotations and the execution of orders in the national market
system. Most significantly:
• The letter supports the creation of minimum access standards that would provide
market participants with non-discriminatory access to all displayed prices for a security
(and not only the best displayed bid and offer for that security) no matter where those
prices are displayed and that would reduce the current barriers to intermarket access.
• The letter supports limiting to a de minimis amount the fees for the execution of orders
that can be imposed by all quoting market centers, quoting market participants, and
broker-dealers that display attributable quotes through SROs.
• The letter supports the proposals that would require every SRO to establish and enforce
rules requiring its members to avoid locking or crossing the quotations of quoting
market centers and quoting market participants and to prohibit members from engaging
in a pattern or practice of locking or crossing the quotations in any security.
3
III. Subpenny Quoting Proposal
The letter strongly supports the subpenny quoting proposal, which would prohibit
market participants from accepting, ranking, or displaying orders, quotes, or indications of
interest in a pricing increment less than a penny.
The letter states that while the Institute strongly supported the move to decimalization
and the trading of securities in minimum increments of one penny, it has strongly opposed the
entry of orders and the quoting of securities in subpennies. Specifically, the letter states that
permitting the entry of orders and the quoting of securities in subpennies would eliminate
much of the benefits brought by decimalization and would exacerbate many of the unintended
consequences that have arisen in the securities markets since its implementation, which have
proven harmful to mutual funds and their shareholders.
IV. Market Data Proposal
The market data proposal would amend the rules and joint industry plans for
disseminating market information to the public. Most significantly, the proposal would modify
the formulas for allocating market data revenues.
The letter generally supports revisions to the allocation of market data revenue that
would discourage practices that currently exist solely to generate increased revenue. In
addition, to the extent that the revenues from market data allocated to the markets do not reflect
the true costs of collecting and disseminating that data to the marketplace and operating the
markets, the letter recommends that the Commission create an allocation system that better
reflects these costs.
The letter also supports other changes made to the joint industry plans, specifically: (1)
the amendment to the joint industry plans that would broaden participation in their
governance; (2) amendments relating to the independent distribution of market information;
and (3) the proposed rule to require SROs to act jointly pursuant to one or more national market
system plans to disseminate consolidated information for NMS Stocks.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 17722, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 17722.