Monday, July 6, 2009

It Is Time For The SEC/NYSE To Respond To The NASDAQ's SLP Clarification Requests

Now that Goldman and the NYSE's Supplemental Liquidity Provider program have finally attracted a critical mass of necessary (and hopefully sufficient) public attention, Zero Hedge would like to readdress an overlooked complaint in which none other than the NASDAQ Stock Market LLC vociferously blasts the NYSE, the SLP program, and some of the underlying assumptions. Zero Hedge has discussed this issue extensively in the past, yet neither the SEC nor the NYSE (essentially, FINRA) seem to have ever addressed any of the NASDAQ's concerns. Zero Hedge believes the time has come for the later two regulatory organizations to provide some feedback to NASDAQ's concerns.

To summarize the concerns highlighted previously, as part of the NYSE's public solicitation for comments when launching the SLP program, only the NASDAQ provided its perspectives on this program. Keep in mind, one would have to be a very aggressive anti-conspiratorial vigilante to accuse the NASDAQ of being an enterprise which sees patterns where others don't (or assume impossible).

The key objections from the Nasdaq are presented below, and the entire paper is provided for our readers' convenience (highlights and italics added).
Taken together, the SLP Proposals provide NYSE with the unparalleled ability to burden competition for order flow and executions without explaining why such ability is necessary or even prudent. For example, the SLP Creation Proposal limits SLPs to firms that engage in proprietary trading, excluding NES and others that operate on an agency basis either to comply [*6] with Regulation NMS (in the case of NES) or by choice. NYSE fails to explain why this limitation is necessary or prudent. As stated earlier, NASDAQ has often been the largest liquidity provider to the NYSE and yet would be disqualified from serving as an SLP under the SLP Proposals. NYSE fails to explain why proprietary liquidity is more valuable than agency liquidity, or why proprietary liquidity should be favored over agency liquidity. NYSE claims that the proposal is designed to prompt liquidity provision but it simultaneously disqualifies large liquidity providers.

In NASDAQ's view, these irregularities reveal that NYSE's true motivation for the SLP Proposals is to discriminate among its members and to burden some members' ability to compete with NYSE. NYSE's failure to explain adequately either the operation or the rationale for its proposed rule is evidence that NYSE's stated basis for the proposal is a pretext. NYSE's proposals are a naked attempt to disadvantage one group of members -- those that compete with NYSE -- to benefit another class of members -- those that do not compete with NYSE...

Perhaps most surprising is the NYSE's aggressive attempt to implement these proposals on an immediately- effective basis. In doing so, the NYSE prompted the Commission to act inconsistently with past practice, inconsistently with its Rule Streamlining Guidance issued in July of 2008 n5, and inconsistently with its obligation to ensure that self-regulatory organizations comply with their obligations under Section 6 of the Securities and Exchange Act [*8] of 1934. NASDAQ, as an active proponent of the Rule Streamlining Guidance, is concerned that the NYSE will undermine that streamlining effort by attempting to leverage the Guidance in an inappropriate manner.

To support immediate effectiveness, the NYSE SLP Creation Proposal cleverly collects numerous past rule proposals that touch tangentially upon the topic of market makers and fees. None of the cited proposals is directly appurtenant to NYSE's SLP Proposals. For example, the Commission has not previously approved the creation of a new class of market participants on an immediately effective basis, and none of the cited proposals stands for that proposition. The Commission [*9] has not approved a new process for discriminating between members without requiring member representation or other governance protection for members. The NYSE attempted to overwhelm this weakness through sheer numbers of citations.

The NYSE has demonstrated there are many latent questions regarding its closeness with the main and only SLP provider, Goldman Sachs. In order to faciltitate the spirit of transparency and deobfuscation, Zero Hedge kindly requests that Mr. Ray Pellecchia answer these questions which not only the NASDAQ but Zero Hedge and its readers find of great interest.

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