Hi, I just sent a letter to the SEC about the regulation that's messing up Island's leadership in the QQQ and other ETFs. Sorry to post this entire long letter, but I wanted to encourage other traders to write to the SEC about this issue. Emails can be sent to: John Polise Senior Special Counsel Division of Market Regulation at: PoliseJ@SEC.GOV Let's tell the SEC we want them to quit inhibiting Island's ability to make better markets! Here's the letter I sent (I coudn't include the earlier emails on the thread, as it made this post too long. I can post them separately if anyone's interested): Dear Mr. Polise, This is in reply to your email of 9/29/02 (a response to my email to the SEC). Thanks very much for the background on the Island ETF situation. I appreciate the opportunity to continue the dialog and express my views to the SEC. You say in your email (included below): "These [Island's] quotes would then be included in the national best quote display. This requirement is intended to help investors receive the best possible execution for their orders . . ." The best quote display you speak of is a misnomer, as it compares quotes from automated venues such as Island (or would, if Island were to participate), with quotes from market makers and specialists. Any savvy trader knows that quotes from floor-based exchanges cannot be trusted, as specialists have what amounts to a free 30-second option. During that 30 seconds they can hold pubic orders hostage while waiting to see in what direction the market will move. This is why knowledgeable traders don't want to trade with specialists. Indeed, executions and reporting of fills from floor-based exchanges are so slow as to render them useless to any trader whose methods require speed. Comparing Island's quotes to floor-based quotes, and calling a floor-based quote "best" if it betters Island's quote by several pennies, is a joke. Island's quotes are real, floor-based quotes are anyone's guess. That's why Island -- through honest competition and provision of superior service, not regulatory advantage -- became the largest venue for QQQ trading. And it's why exchanges like AMEX need SEC regulations (such as the one we're discussing) in order to compete. The floor-based exchanges can only compete with efficient, inexpensive, automated venues, such as Island, by convincing the SEC to saddle superior competitors with onerous regulation to reduce them to the exchanges' own backward level. The exchanges' only other choice is to vastly improve their own service to the public. The exchanges have chosen the former option. And the SEC, with regulations such as those regarding the public quote system, help exchange-oriented special interests at the expense of the public. Almost any knowledgeable trader will tell you that Island's service is the best in the business, far exceeding that of any exchange (and particularly AMEX, notorious for intolerably slow executions). To demand that Island post to the public quote system, with its trade-through and quote-through rules, in order to display ETF quotes, is to demand that Island's savvy customers subject themselves to the vagaries of archaic floor-based exchanges. The public is not stupid, and did not make Island the largest market venue for QQQ trading because it is unaware of "better" quotes posted by AMEX. The public gave Island its business because Island provides what is needed and wanted -- speed and certainty of execution, neither of which any floor-based exchange is willing to provide. The SEC must learn, if it is truly interested in promoting fair markets that service the public, that some traders value speed and certainty of execution above price! Frankly, as a trader, I don't care if I get a 5 cent price improvement from AMEX over Island if it takes me 30 seconds to get a fill. By that time, the market may have moved 20 cents against me! That's why traders like my partners and myself refuse to trade at all on non-automated venues such as AMEX and NYSE. It's why your trade-through rules and quote-through rules, imposed on Island, would negatively impact any security subject to them (we don't want our orders ever routed through to AMEX, regardless of price; and we do want our limit orders displayed, regardless of price). Thus, the SEC will negatively impact the ETF's by preventing Island from servicing its public, unfettered, in its superior manner. You say, "Despite the exemption's accommodation of Island's trading system, Island has nonetheless eschewed participation in ITS." As an Island customer, I hope Island will always eschew participation in ITS as long as the SEC imposes any trade-through or quote-through rules. The SEC's exemption does little to accommodate Island's trading system. Any imposition of trade-through rules means that Island's customers can be subjected to trading with an AMEX specialist, which is unacceptable to savvy traders -- who can route their orders to AMEX if they desire to do so. Furthermore, knowledgeable traders want to be able to display any limit order they choose to place, regardless of whether it appears to expose them to a worse price than a posted AMEX quote. And knowledgeable traders want to see the entire limit order book so they can know where the real market is (as represented by Island quotes and other ECN quotes that can be filled in less than a second) -- not the unreliable fantasy of an AMEX quote (that might be filled, if it suits the specialist's whim, in 30 seconds or more). Innovators such as Island are trying to move the markets forward into the future, while the SEC, by imposing such rules, tends to throw them back into the past. Please consider the following comments gleaned from an internet trading forum: ". . . actually I think TS [Trade Station Securities] is still preferencing ISLD. It's just that ISLD QQQ volume has declined significantly since they are no longer displaying quotes. I spoke with an ISLD rep today and he confirmed this. It really sucks not being able to see the ISLD book. A 20K block could be taken care of w/ relative ease several weeks ago -- now you break a little sweat while waiting for your fills." Can the SEC explain how inhibiting Island's ability to display ETF quotes benefits the public? And another comment from this trading forum (posted after Island stopped displaying its ETF quotes): "I trade QQQ almost exclusively (although not your 10K-20K per lot), and as far as I can tell, ISLD is still the best source of QQQ liquidity. I almost always get price improvement over what I see on ARCA. If I want in (or out) with an instant fill, the best way seems to be a sweep of ISLD by a few cents outside. But you're right, the spreads are not nearly as tight as they used to be (talking pennies here) and I'm considering moving over to NQ for that reason." [italics added for emphasis] Can the SEC explain how wider spreads benefit the public? And how forcing the public out of ETF trading to another security (because ETFs have been impaired) benefits any member of the public? And another trading forum post (posted 10/22/02): "I used to trade QQQ only on ISLD and never had any problems with execution. Now ARCA problems similar to what was described happen all the time. "Does anyone know and can explain how to resolve this issue, and why ARCA is providing such bad executions? "Looks like trading blind on ISLD is the only solution...." [italics added] Do you see the lengths to which traders will go to avoid trading on AMEX? (By the way, the next post in the forum thread explains that ARCA trades through to AMEX when AMEX shows a "better" quote, which is the reason for the lousy executions!) The SEC, if it is interested in the public's viewpoint, should also be aware of this post: "AMEX still sucks bigtime, and if there is even a *chance* that my market order may get autorouted there, I would not send a 5-figure order to Intelligent [intelligent routing that may end up going to AMEX]." Can the SEC explain how subjecting traders and investors to the risk of transacting QQQ trades on AMEX -- rather than on Island, the fastest and most fair trading forum in America -- benefits anyone but exchange insiders? It appears to this member of the public that the SEC is supporting the exchanges in their efforts to impede newer, more innovative, fairer trading venues that improve the markets and benefit the public. The SEC should champion Island as the new standard in fast, fair securities marketplaces that promote efficient price discovery and a level playing field. Your agency should use its regulatory powers to move all US equity, option, and futures markets toward the ECN model, not to help vested interests maintain advantages bestowed on them by yesteryear's exchanges with their protectionist, SEC-sanctioned rules. I would appreciate your forwarding this email to anyone concerned with this issue, and particularly to whomever in your agency is working for the public interest, rather than for vested interests. Thank you, Julie Connard
<< I think you are a little late and Island already rolled over ... >> Yes, I know. But I sent a copy of my letter to Island's General Counsel, and from his response I think there's still hope. Island doesn't want this SEC regulation to stand, and I think they're fighting it. Public protest directly to the SEC, and lots of it, might get the SEC to reconsider. I mean, they claim the rule is to protect the public. How can they keep claiming that if we, the pubic, say it's NOT in our interest? (We're the ones who actually trade; I wonder if anyone at the SEC has ever chosen to execute on AMEX instead of Island!) Julie
FWIW, I think that this inhibition of the ECNs is a MUCH bigger problem that the PDT rules. Even though I am near certain that it is a monumental waste of time, I will also make the effort to lend my voice to effort to rescind these regulations. Excellent letter Julie. I will plagiarize some of it for my letters. Thanks to all who have given us the points of contact on this subject.
This is good. The SEC and the CFTC need to hear from traders. All they hear is self-serving twisted spin from the exchange lobbyists. I think a paper letter has more impact. CC. your Congressman on it as well. Your representative only hears from exchange lobbyists. Be logical and don't use swear words in your letter. The regulators read and actually follow up on letters to them.
Julie; Thank you for a great letter and the effort. I don't believe it's ever too late to apply more pressure and will do my part. TonySD: I believe that this regulation and the PDT rule are both part of the same effort. That is to retard the electronic linkage of all markets, especially options, and to prevent a levelling of the playing field. The end game here is of course to maintain the advantages enjoyed by floor based traders for decades and close the door on the democratization of the markets. Part of the problem also is that the SEC is generally made up of former exchange members and their old allegiances are showing. Nevertheless we must continue to try. An afterthought: it occurs to me that there are usually a couple pennies tacked onto closing trades that are marked "SEC fee". I wonder how much that amounts to over a year and if that might be an avenue to explore. If traders switch from cubes to E-minis what becomes of those pennies and the SEC's funding?
Julie Public protest directly to the SEC, and lots of it, might get the SEC to reconsider. I mean, they claim the rule is to protect the public. Tea The SEC and the CFTC need to hear from traders. All they hear is self-serving twisted spin from the exchange lobbyists. Your representative only hears from exchange lobbyists. Be logical and don't use swear words in your letter. The regulators read and actually follow up on letters to them. white17 I don't believe it's ever too late to apply more pressure and will do my part. I believe that this regulation and the PDT rule are both part of the same effort. That is . . . to prevent a levelling of the playing field. . . and close the door on the democratization of the markets.
I have already emailed the SEC guy Julie mentioned in her letter. I think if all of us spread the word among people we know and on other trading forums and websites about what kind of things people need to do with regard to the ETFs issue, we'll be heard.
<< I think you are a little late and Island already rolled over ... >> Yes, I know. But I sent a copy of my letter to Island's General Counsel, and from his response I think there's still hope. Island doesn't want this SEC regulation to stand, and I think they're fighting it. Public protest directly to the SEC, and lots of it, might get the SEC to reconsider. I mean, they claim the rule is to protect the public. How can they keep claiming that if we, the pubic, say it's NOT in our interest? (We're the ones who actually trade; I wonder if anyone at the SEC has ever chosen to execute on AMEX instead of Island!) Julie
Tony -- please feel free to plagerize anything form my letter! Tea -- I think cc'ing one's congressman on letters sent to the SEC is a good idea. White17 -- Well said! I agree that democratization of the markets is what's at stake. It's the ECN model vs the floor-based model. Estrader -- I agree that we need to spread the word about this issue on the trading forums. By the way, if anyone cares to post my letter to the SEC on any other trading forum, please feel free. I'd love to get lots of traders emailing the SEC about this (or sending snail mail). Island's General Counsel, who I asked to review my letter, suggested I send it to all the SEC commissioners. He's going to give me the commissioners' contact info. If anyone wants it, I'll post it here. (If anyone from the SEC is reading this, Island had nothing to do with my decision to send a letter, or with any public protest effort). Julie