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[19033]
July 21, 2005
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 25-05
SEC RULES MEMBERS No. 86-05
RE: ICI LETTER ON NYSE PROPOSAL RELATING TO A HYBRID MARKET
The Institute has filed a comment letter with the Securities and Exchange Commission
on a proposed rule change filed by the New York Stock Exchange relating to the creation of a
hybrid market.1 The most significant aspects of the comment letter are summarized below and
a copy of the letter is attached.
Specialist Participation in the Hybrid Market
The letter states that the Institute continues to be concerned about the types of
information that specialists would have access to when interacting with investor orders in the
hybrid market, when they obtain access to this information, and how this information is used in
interacting with investor orders.
Algorithmic “Price Improvement”
Under the proposal, specialists will have the ability to algorithmically provide “price
improvement” to incoming orders. The letter opposes providing such a functionality to
specialists. The letter states that allowing specialists to electronically interact with incoming
orders in this manner and, in effect, step ahead of investor orders on the Exchange’s limit order
book, runs counter to the NYSE’s goal of providing incentive to investors to place orders on the
Exchange.
The current proposal also modifies the parameters for providing such “price
improvement,” significantly reducing the restrictions on specialists. The letter disagrees with
the proposition stated in the Release that such a reduction preserves incentives for the limit
orders on the display book to establish the best price. Similarly, the letter disagrees that the
benefit of providing “price improvement” to incoming orders under such circumstances would
outweigh the potential disincentives to post aggressive limit orders.
1 Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (June 29, 2005) (“Release”).
2
Finally, the letter urges the Exchange to amend the proposal to provide floor brokers
with the same ability to provide electronic “price improvement” to orders via a discretionary
order type. The letter notes that this is a functionality that institutional investors have been
requesting from the Exchange in order to level the playing field between specialists and
investors in this area.
Specialist Access to Trading Information
Under the proposal, specialists, via the proposed specialist algorithm, would be
permitted to send messages to the display book to quote or trade in reaction to specified types
of information including, among other things, “incoming orders as they are entering NYSE
systems.” The letter opposes providing specialists with the ability to electronically “see” certain
information before other market participants and to make quoting and trading decisions based
on that information.
Broker Agency Interest File
Under the proposal, floor brokers will have the ability to place on the Exchange’s limit
order book an “agency interest file” with respect to orders the broker is representing. While
brokers would have the ability to completely conceal their orders from other market
participants through this functionality (except at the best bid and offer), their orders would be
executed on parity with investors’ orders placed on the NYSE’s display book, which are
required to be displayed for the full size of the orders.
The letter recommends that the Exchange amend the proposal to eliminate such a
priority system and provide execution priority only to the portion of orders represented by
floor brokers that are displayed. The letter states that fundamental market fairness should
dictate that displayed orders should be protected and provided priority in the execution process
over “hidden” orders and that such a system would reward market participants for displaying
orders. If the Exchange determines not to make such a change, the letter recommends that
investors be provided with their own reserve feature where they also would have the ability to
conceal a portion of their orders (and not be required to do so solely through the use of a floor
broker).
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 19033, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 19033.