Comment Letter on File No. SR-ISE-2010-73
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_________ G 0 P T R A D; I N G p I , 1 August 9,2010 Ms. Elizabeth M. Murphy, Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090 Re: File Number SR-ISE-201O-73 Dear Ms. Murphy: Group One recognizes that ISE originally submitted File Number SR-ISE-2009-35, which was approved by Staff under its delegated authority granted by the Commission. For some time now, the Commission has been reviewing the wisdom of granting the effectiveness of that rule proposal. Now in an apparent end run around the Commission's thoughtful consideration, ISE has submitted a slightly modified revision of its original proposal. This new proposal carries with it the same weaknesses and dangers to customer protection considerations, which were apparent in the original proposal. ISE continues to ignore concerns of Price Improvement and the potential detriment to the investor associated with approval of either of its rule proposals. ISE initially commented that the majority of orders executed in the options marketplace are automatically executed without an opportunity for price improvement and that there is nothing special about orders presented as crosses. ISE also states that other option Exchanges already allow customer-to-customer crosses without any market exposure. These arguments are disingenuous for two reasons. The first reason is that while it is true that most orders are executed automatically without the opportunity for price improvement; there is a major difference in these orders, as they are NOT orders that simply happen to cross; rather they are automatic executions on the NBBO where the order happens to cross and the contra parties are not aware of the other incoming order. The second important distinction is that there is an inherent conflict of interest that exists in a broker facilitated customer cross that does not exist in a customer to customer cross. Price discovery and transparency are crucial components of our capital markets and processes that encourage market integrity. Where a broker facilitated order is crossed without market exposure, there is simply no incentive for the broker to give the customer the best price. It is imperative that customers be afforded an opportunity for price improvement. Another way to ask this is "Why wouldn't the customer want the opportunity for price improvement?"
Transcript of Comment Letter on File No. SR-ISE-2010-73
_________
G 0 P T R A D; I N G p
I
,1
August 9,2010
Ms. Elizabeth M. Murphy, Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090
Re: File Number SR-ISE-201O-73
Dear Ms. Murphy:
Group One recognizes that ISE originally submitted File Number SR-ISE-2009-35, which was approved by Staff under its delegated authority granted by the Commission. For some time now, the Commission has been reviewing the wisdom ofgranting the effectiveness ofthat rule proposal.
Now in an apparent end run around the Commission's thoughtful consideration, ISE has submitted a slightly modified revision of its original proposal. This new proposal carries with it the same weaknesses and dangers to customer protection considerations, which were apparent in the original proposal.
ISE continues to ignore concerns of Price Improvement and the potential detriment to the investor associated with approval of either of its rule proposals. ISE initially commented that the majority of orders executed in the options marketplace are automatically executed without an opportunity for price improvement and that there is nothing special about orders presented as crosses. ISE also states that other option Exchanges already allow customer-to-customer crosses without any market exposure.
These arguments are disingenuous for two reasons. The first reason is that while it is true that most orders are executed automatically without the opportunity for price improvement; there is a major difference in these orders, as they are NOT orders that simply happen to cross; rather they are automatic executions on the NBBO where the order happens to cross and the contra parties are not aware ofthe other incoming order. The second important distinction is that there is an inherent conflict of interest that exists in a broker facilitated customer cross that does not exist in a customer to customer cross. Price discovery and transparency are crucial components ofour capital markets and processes that encourage market integrity. Where a broker facilitated order is crossed without market exposure, there is simply no incentive for the broker to give the customer the best price. It is imperative that customers be afforded an opportunity for price improvement. Another way to ask this is "Why wouldn't the customer want the opportunity for price improvement?"
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..A 'c~omer -cuiLOinercrossoctlli-s whena'brokerbas botha:f)uv ii:i1da self brderf~r two custo~~that.· offSet each other. A. bj-bk~r~' c[!stom¢r.cfos~occurs wI1en.~abrok6r take~t1ie6thei~sideofaci!~mer "' .'
. trans'!iCtiQil~ie:the bfokeri~"betting against the custOlner". We ask the Comini;sl~li tolOok8.t}Vhich of th~se·tran5a.ctionsrequires more exposure;rnther fr.tanless. .' ..' . .. .. ' .
· .• WerifealSouIi*iear:~ ~6 •wily' the SEC "youldappro~~- a c~ossingm_echanisinl:illl!doe~ni>di1Imv.f6r p'Jj~e ..... •'d!sc<hieIY, in fIqlarketenvironment focuse<foli bestexecutiqll/allthit ailiri~Wheri 'tbe;iiJdustryls trying to nlQVtlmoreIm'iards greai:ertrnn~arency.How can a broker provjdeilicirbesi~froifat best eiectii.ioil if
·,tliatbroker:aoesn:tattemptto getrn'ice improvement,;or worse: ifth~ brokersubm~ the order for' _execution viaamechallismwhere priceimprovernentisnotpcssible? .,.' ..... .
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·" Approval ofsuch a ruie ~mi process '~.ouldalsO sigrdfi~tly din1inish the .iricenti~~for~ :marl{etmak~t to.· stTclam qu6tes.Streaming·qtiot~shas benefits ~nd risks:'wh~nyoustre-amquotes•.You geito advertise ...•. yourpri(l~~ and llopefuBy transact Vtru1 customei-s. At thesametiJlte; you also expose yourself to other . .marketmaker:s~andprofessjonalcusto!.Uers. If this nile ,IS PllSse<!:it\;yiH be il imljqrturorng point forth6 ,.optioftS nlarketplace; ~slno~Qrde~ inov~Jo:"iiicuonless cr6sS~g'·\.'vherc;th~re '.i$. nO qpp.c>riunity for a
.... " market lilake to paiticipate;bi'oke~s Yii! I' atterilptto~01Ilent th~njarki# byfindiJ;tg ~~on:ll~forders~Q: .'.' ... cl~oss:Jess'<trueJ;Ustoiner.ordersr.y;.lil:tradev.-ltipilarkeftllilker:quotes..}uidtlleba1~ce oftheris~and . .
.heriefitstOquoting \kill.shift drainatically.~.A.;S·tlris happens; quote:qualiiy '\.viU~diIriiD~s~anii~,je'wiJlbe: ·Jefi:.wit.~ a ·,model': where reaUiquidity iSI:!'t displayed, but rather foundlipswrs~6r;Yiadarkpools or.' .
. ' otherJ~ciHtiesthatbbscur.e]iqllidity.· Withoutiricentive to quote;theoptibnsmarket.l11aysoon look l110re .. ' _ ..•..... . ..
.. . arid mor~.l ike the equity market This de,ielopment '.\fill ~tin B,sigtiificantd~trinlentJotb~ InyeStoi~'.,' .
• ...• =..IJ1Iight oithe flash ,crash and the'ong~nig in\'eSti~tion iutbrrs.cauies, .the~omriiis;i~hisenc6Uraged to ..'. ·take it cautioll$' approacllto"arriechanism that wiI! undoiJbtedlycfuninisii the disPUly¢dJiquidityanderodc;
.. '~\he 'mceutives tomakeniarkets' and stream quotes providing 2iJ~¢merswith increased 0pp0rtumties for_.· •. 'more market liquidirvandbetter prices, . .' ." '. -.
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· Forihd (easons setforth above, w~be!ieve th~ COrrimission sIloiild seriously.~orisjdex:-its~proYaIQf .... ' · the turrentnl1e..pfoposaialid carefully evaluate these ccjmmentsarid:thoseprelfi,?usI5"iTIadem ~1e< .' .. petitior{sfih:idOY CBOEand NI-\SDAQ OIvIXPHLX..'. '. . . . .. .'. ......
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