From: Joe Gawronski [jgawronski@rblt.com]
Sent: Thursday, June 24, 2004 9:16 AM
To: chairmanoffice@sec.gov; marketing@sec.gov; Atkinsp@sec.gov; Camposr@sec.gov; 
Glassmanc@sec.gov; Goldschmid@sec.gov; Royep@sec.gov; Nazaretha@sec.gov; 
Colbyr@sec.gov; Robert.Glauber@nasd.com; Mary.Shapiro@nasd.com
Cc: rule-comments@sec.gov
Subject: supplemental request for comment re trade-through and opt-out (File 
No.: S7-10-04)

Hon. William H. Donaldson, Chairman
U.S. Securities and Exchange Commission
450 First Street, NW
Washington, DC 20549 

re: Reg NMS/trade-through rule supplemental request for comment

Dear Chairman Donaldson: 

In light of significant new information presented at the recent Reg NMS hearing, 
the Commission has wisely extended the comment period and published a 
supplemental request for comment regarding a number of questions arising from 
the views expressed by the panelists about the proposals and the ensuing 
dialogue with the Commissioners and staff at the hearing.  Before we address the 
Commissions specific questions regarding the necessity of the opt-out and other 
exceptions to trade-through, we thought it might be valuable to step back a 
moment to take a big picture look at where we are with respect to 
trade-through today versus a year ago and also re-examine the goals that the 
trade-through rule was meant to further to make sure we stay focused on the 
right issues.  We do so with the interest of the trading public and the 
integrity of our markets in mind.  We have always taken a serious interest in 
our countrys market structure as it impacts greatly our ability to do our job 
for our public customers.  As the Commission has repeatedly emphasized, we will 
approach this wearing our public policy hat and not merely from self-interest.  
Frankly, as pure agents that trade both listed and OTC stocks for the public, 
the publics interest is our own so that is an easy charge.

To begin with, market forces (namely the demands of buy-side customers) and 
anticipated regulatory proposals (namely the prospect of modifications to the 
trade-through rule that would set an amount by which an electronic market could 
trade-through a manual market, as well as allow investors to opt-out of the 
trade-through rule entirely) have pushed the floor-based exchanges, most notably 
the NYSE, to make public commitments to expand auto-ex facilities over the 
coming months.  These significant changes from just months ago are scheduled for 
implementation prior to the enactment of Reg NMS.  Together with the fast quote 
vs. slow quote distinction contemplated by the revised NMS proposal, we believe 
that these changes will address many of the perceived problems with the current 
trade-through rule regime.  Investors demanding speed and certainty will no 
longer be able to assert that they are being disadvantaged by the manual nature 
of certain markets as they will able to trade-through them if they so desire.

In fact, we wonder if major rule changes on trade-through beyond the fast 
quote/slow quote distinction are necessary at all.  Certainly there are some 
additional technology enhancements that should be pursued to make the rule 
function more effectively, e.g.  injecting new life into the antiquated ITS 
framework by incorporating technology similar to the smart-order routers already 
available from private vendors, and continuing the development by the NYSE of 
enhancements to its handhelds that will soon allow a broker to go directly out 
to the ECNs or regional exchanges to get better prices if they are posted there 
rather than having the specialist be his/her only avenue to access other 
marketplaces.  However, we believe that the basic trade-through regime that 
exists today supplemented with the fast quote/slow quote distinction would 
function well.  In fact, a more major overhaul might even result in serious 
unintended negative consequences.  In addition, let us recall that the 
Commission has always recognized the need to provide reasonable latitude within 
its rule and policy structure to ensure that our rapidly changing markets are 
not unreasonably constrained by rigid rules that require frequent modification 
via our more deliberate, more time-consuming process of rule change.  The simple 
fact is rule modification cannot keep pace with changes in market structure and 
the pace of those changes is increasing dramatically.  It is unreasonable to 
expect that the SEC or any regulatory body can accurately predict what our 
market structure will look like even a few years from now.

With this in mind, it is important that the Commission be careful in crafting 
the final rules that it achieves two things.  First, it should not create a 
structure so rigid that it is not flexible enough to adapt to a rapidly evolving 
market structure.  Second, and above all else, the proposals must focus on 
serving the original goals behind the adoption of trade-through protection 
rather than get hung up on the intricacies of the rule itself.  The tail (the 
trade-through rule, whatever its form) must not be allowed to wag the dog (the 
goal of investor protection).  In fact, it may be more appropriate for the 
Commission to mandate that the SROs clean up the inefficiencies of ITS, 
eliminate unnecessary time delays in responding to orders, and insist that their 
members pursue best execution as a guideline, rather than re-write a complex 
trade-through rule.

The trade-through rule was created to protect public investors from 
professionals choosing to avoid their better bids and offers and trading among 
an elite club instead.  It put the 100 share order on equal footing with the 
100,000 share order.  It protected and rewarded limit orders.  It had the added 
benefit of creating a clear standard of best price that prevented 
broker-dealers from abusing their own customer orders.  Ultimately, it protected 
the integrity of the markets.  Importantly, it also successfully protected the 
individual who was traded-through by providing him/her with the right to demand 
an execution.  The proposed rule instead seeks to rigidly define trade-throughs, 
prevent them and likely make such trade-throughs sanctionable rule violations, 
but fails to fully protect the interest of the public investor when he/she is 
traded-through.  Any rule that does not offer guaranteed recourse to the better 
bid or offer being traded-through does not pass the public interest test.   
Preventing trade-throughs may make sense, but, if and when they occur, immediate 
recourse for the investor should be available.  The rules should be designed to 
protect public investors throughout the entire process.  

With that long-winded caveat and realizing that the SEC seems to be leaning 
towards rules that prevent trade-throughs and make non-compliance a sanctionable 
violation (rather than simply providing a means of recourse for the investor who 
has been traded-through), we will now address one of the Commissions specific 
questions.  The SEC has requested comments as to whether, if it were to adopt an 
exception to the trade-through rule for manual quotes, the proposed opt-out 
exception would still be necessary or desirable.  There are four reasons why we 
strongly believe that an opt-out would generally no longer be necessary or 
desirable under such circumstances.  However, we believe the Commission should 
consider one exception to this general rule that would permit a broker-dealer to 
meet its best execution responsibilities, and we will address that limited 
proposed exemption at the end of this letter.

First and foremost, the principal complaint that proponents of trade-through 
rule relief had levied against the current rulethat investors are not free to 
choose speed and/or certainty of execution over best advertised price even 
though that so-called best price might slip away due to the manual nature of 
certain marketswould no longer be an issue under the Commissions new proposal.  
The applicability of trade-through protection would be based on whether a 
particular quote is capable of providing an immediate automated response on a 
quote-by-quote basis.  If a market chooses to remain entirely manual or, more 
likely, go from an automated quotation to a manual one in certain instances 
(e.g. when abnormal trading volumes suggest that human intervention may find an 
equilibrium price with less volatility), investors will be free to ignore that 
quote and trade-through it, even if it is in fact the best advertised price.  Of 
course, they will be doing this at their own peril, since these are exactly the 
times that a manual process seems to add the most value.  But, importantly, they 
will have a choice.  If a quote is instantly accessible via a system that can 
provide an immediate automated response, such as the NYSEs proposed expanded 
Direct + auto-execution facility, and represents the best bid or offer, what 
public policy reason can justify an investor, typically a fiduciary, opting 
out to select a worse price on another exchange or ECN?  We have yet to hear an 
answer to this question that advances the public interest, and instead have only 
heard answers that advance the business models of certain industry participants.

Second, providing investors with the ability to opt-out has the potential to 
eviscerate completely one of the trade-through rules most basic 
principles--that all investors, irrespective of their connections, affiliations 
and locations, should be afforded equal treatment.  The ability of one side of a 
trade to opt-out means that another order may in fact be traded-through, which 
might often be that of a small retail investor.  That investor then misses an 
opportunity to trade (unless he or she is given some other recourse). Allowing 
an opt-out is akin to a shoplifter being allowed to opt-out of the law when the 
proprietor whose goods are being stolen is the one being hurt!  

Third, allowing the ability to opt-out will likely increase internalization by 
broker-dealers rather than encourage more interaction of orders in a centralized 
market or network of markets to create better prices.  Even though the decision 
to opt-out will rest with the investor giving the order to the broker-dealer, we 
would not be surprised to see variations of payment for order flow develop in 
this context as an unintended consequence, e.g. payment for opt-out permission 
or tiered commission structures based on whether opt-out permission is given.  
Also, there is little doubt in our minds that order management systems will be 
tweaked to provide an option for a default setting that in effect makes the 
investors opt-out box permanently checked rather than actually having the 
investor consider opting out on a true order-by-order basis.  Opting-out could 
quickly become the rule rather than the exception in such circumstances..

Fourth, the actual implementation of an opt-out would be a nightmare.  Required 
technology changes to order management systems and clearing systems, as well as 
front and back office procedure modifications (such as calculating the cost of 
an opt-out and providing it to a customer on a confirm), would be costly, and 
fall disproportionately on smaller broker-dealers and asset managers.  Several 
participants at the Reg NMS hearings (who we might add were neither representing 
the ECNs or exchanges that tend to have the greatest vested interest in the 
outcome of this debate) concurred strongly on this point.

That said, there are a few circumstances in which the strictness of a 
trade-through rule that would provide for sanctionable violations should be 
relaxed.  However, these circumstances should indeed be limited.  And when they 
occur, the party traded-through should nevertheless be able to avail herself of 
a process by which she can immediately be made whole.  We believe that 
broker-dealers will on rare occasion still need to trade-through in order to 
fulfill their best execution duties to their clients and should be permitted to 
do so without triggering a violation under the rules of the market center that 
would be responsible for establish[ing], maintain[ing], and enforce[ing] 
policies and procedures reasonably designed to prevent trade-throughs.  
However, when this occurs, the broker-dealer that has traded-through should be 
required to file a document within 24 hours with its examining authority 
explaining why the trade-through was necessary from the perspective of best 
execution.  In addition, while such a trade-through deemed acceptable by the 
examining authority would not be deemed a violation subject to fine, censure, 
etc., the party who was traded-through should still have recourse as he/she does 
today under the current trade-through rule regime, namely the ability to demand 
to be filled by the party trading-through.  This is important because, as 
mentioned above, all investor orders should be treated equally, so allowing 
someone to opt-out in an absolute sense (i.e. without even offering the 
traded-through party economic recourse) is never justified.  Let us present a 
couple of examples that will hopefully give a flavor for the limited types of 
circumstances that would justify a trade-through (so long as recourse for the 
person traded-through is still available).

The Commission itself has posed a potential use of the opt-out exception, 
namely to by-pass quotations likely to be unavailable due to prior execution.  
The Commission has correctly anticipated that with the fast-paced nature of the 
current environment in which quotes do little more than flicker in liquid stocks 
perhaps a specific exception to the trade-through rule is needed to provide 
market participants with acceptable means to execute orders under such 
conditions.  It would not benefit the markets as a whole or the particular 
investor whose order was held by a broker in this situation to force the broker 
to attempt to access such flickering quotes.  The problem of quotes becoming 
inaccessible because they are unreadable is only going to get worse as 
algorithmic trading is more broadly adopted.  Soon, an actual human investor 
trying to buy or sell stock wont be able to see the bids and offers at allonly 
the computers will.  Ironically, automated markets demanding trade-through 
relief by claiming manual markets are inaccessible may in fact end up being even 
less accessible by virtue of this lack of readability. This situation highlights 
one of the reasons the Commissions appropriate role should be limited to 
creating an environment in which SROs must function, recognizing that the SEC 
rule-changing process is necessarily a much slower and thoughtful process than 
the pace of change occurring in the markets they must regulate.

A second instance where more flexibility would be needed is if a broker were 
presented with an opportunity to buy say a 25,000 share block for a client and 
there were a 100 share offer on another marketplace a penny better.  Requiring 
the broker to attempt to access that offer first would be detrimental to the 
client and the market as a whole as the larger trade might be missed in the 
interim.  However, that 100 share offer should be protected as it is today under 
the current rules and have the opportunity on a post trade-through basis to 
demand that he get the same price as the larger order.

In summary, we believe that (i) the Commissions final proposals would best 
serve the public if they focused on high-level principles such as investor 
protection rather than on nuanced rule changes that will have a difficult time 
keeping up with the incredible pace of market changes, (ii) there is no public 
policy justification for the concept of a broad opt-out under the Commissions 
revised proposal, and (iii) a broad opt-out would pose real dangers (most 
notably, unequal treatment of investors and increased internalization), and 
would be prohibitively expensive to implement.

Thank you for the opportunity to comment.

Sincerely,

Richard A. Rosenblatt, CEO
Joseph C. Gawronski, COO
Rosenblatt Securities Inc.
20 Broad Street                        
New York, NY 10005
212-943-5225

cc:        The Honorable Paul S. Atkins                     
The Honorable Roel C. Campos                  
The Honorable Cynthia A. Glassman           
The Honorable Harvey J. Goldschmid         
Paul F. Roye, Director, Division of Investment Management
Annette L. Nazareth, Director, Division of Market Regulation
Bob Colby, Deputy Director, Division of Market Regulation                                                  
Robert R. Glauber, Chairman and Chief Executive Officer, NASD
Mary L. Shapiro, Vice Chairman and President Regulatory Policy and Oversight, 
NASD