Nice letter regarding advertised size on MM bids and offers..
October 14, 2001
Dear Mr. Katz,
I am writing to you with great urgency regarding the above referenced proposed rule
change which calls for eliminating the 1000 share display size rule as well as
eliminating current reserve size and automatic refresh requirements. As the watchdog
of the stock trading industry, the Securities and Exchange Commission (SEC) has thus
far been prudent in attempting to stifle the ongoing fraudulent tactics of some
collusive Market Makers (MM). The practice of actually seeking out manipulative
trading methods and unscrupulously taking advantage of loopholes in your laws to
line their pockets at the cost of the public investor has been repetitive and has
historically lead to criminal charges and punitive fines. I present this brief
reminder only to alert your authoritative department that the seedy character of the
selectively deceptive may be returning one again. (Please note that I do not wish to
include all MMs as deceptive. Most are hard working men and women like you and I.
However, it appears that certain sel
f-serving MMs tend to be quite influential over the National Association of Securities
Dealers (NASD) and their other fraternal brother, the National Association of Securities
Dealers Automated Quotation (NASDAQ). To pretend that these three entities do not
interact toward a common greedy goal is naive and dangerous.
This time the NASD is proposing to eliminate their current 1000 share display size
and the size requirement of the automatic refresh rule. As it stands now, a MMs display
size is decremented by orders received via the Small Order Execution System (SOES),
the MM must decrement accordingly until the size displayed is executed against. The
automatic refresh requirement is a minimum of 1000 shares if the reserve size is greater
than 1000 or the remainder of the reserve size if it is less than 1000 shares.
The goal of the SEC has been to maintain a level playing field so that the average
investor is not blindly swindled in the whirlwind of price fixing, market manipulation
and fabricated price fluctuations that may be concocted by certain stock brokers or
MMs. I urge you to step in and flex your protective muscles NOW. Allowing a MM to sit
on any side of the market (buy or sell) with only 100 shares displayed and only 100
shares of automatic refresh required is permitting MM even easier access to
unnaturally direct a stocks movement. Moreover, the reserve size rule is virtually
eliminated and with it the limited transparency of a securities flow. Another thing
cleverly done away with is the MMs claimed risk - which has been the core of their
arguments for any rule change proposed. They are asking to decease their risk in an
unprecedented way but yet be afforded to continue their superior trading status over
mere investors and traders. (Remember, MM do not have to adhere to any short-sale
rules nor do they have to honor orders presented to them over the Selectnet broadcast
system - even at their current inside quotation!).
Dear Mr. Katz , all stocks find their natural level as determined by buyers and
sellers and daily market conditions. Do you know that that permitting a MM to display
only 100 shares during a particular stock movement affords them increased control to
manipulate the natural flow and speed of that security while profiting virtually
risk-free. The following is just one example of manipulating price fluctuations,
reducing transparency interfering with the natural flow of a stock move and ultimately
hurting the small investor in the pocket. And I do not need to remind you that this
pocket has become increasingly sensitive considering our current economic situation.
An investor, Mr. Hopenpray wants to buy 5000 shares of ABCD stock at any price up to
$10.65. At about the same time a smaller investor, Mrs. Pickum, wishes to buy 700
shares of ABCD at the market price but no higher than $10.75. The stock is currently
bid at 10 and offered at 10.05.
There are currently several MM offering to sell stock at 10.05, several more at 10.10
and more scattered through to 11.15. There are also 3000 cumulative shares offered by
various ECNs (Electronically Compared Network) from 10.05 through 10.20. Note that all
the mms are displaying only 100 shares, with unknown reserve size nor any requirements
to display any portion of such other than only 100 shares!!
A MM (symbol RATT) notices that he is selling 100 shares of ABCD at 10.05 rather
quickly via SOES and has gone thru 800 shares at this price. He observes the same for
several other MM at 10.05 and quickly buys the 3000 shares from the visible ECNs for
an average price of 10.12. He also replaces these three 1000 share ECN orders with
three new 100 share ECN orders to sell stock at 10.16 and 10.17 (thus slowing this
movement so as to better judge where to sell his net 2200 shares of ABCD). RATT's
ECN orders are executed against by the 5000 share order which has thus far been able
to buy only 200 shares from 10.05 - 10.35. The remaining 2000 shares continue to drive
the price of ABCD to 10.65, where RATT unloads his remaining 1600 shares. Finally,
Mrs. Pickums purchases her shares at 10.65.
The way the market operates now, 5000 shares of ABCD would more likely get filled
between 10.05 and 10.35 (even with the creative trickeries of MM placing 100 share
ECN orders to slow movement and create conditions favorable them). I believe that
another motivating factor to this proposal was that this current practice of throwing
100 share ECN orders into a stock, is becoming costly and bothersome. I suggest to you,
Mr. , that this manipulative behavior be curbed by requiring a 1000 share minimum
for ECN orders placed by MMs.
Returning to my example, Mrs. Pickum would probably pay no higher than $10.45 for 700
shares of ABCD, not $10.65. Mr. Hopenpray's 5000 share investment would have been
filled by an average price of $10.30 not $10.50. Even though 5000 shares is a
seemingly large order, Mr. Hopenpray does not need to spend one thousand dollars
more for his investment decision. Certainly Mrs. Pickum could use the one hundred
and seventy-five dollars in her pocket.
The above example is obviously not based on a precise formula, but the reality of
actually allowing this proposal a chance to go through, can be seen in it. The example
displays only one type of a plausible stock move. Believe me, There are over six
thousand securities to choose from and MM will utilize these tricks on heavier moving
volatile securities, making more risk-free money while continuously draining liquidity.
Dear Mr. Katz , I have been a registered representative for over 12 years. In that
time I have only seen proposals from the NASD that favors MM with blanket disregard
for the average investor. I have also witnessed landmark criminal charges of collusion
and market manipulation by MM. Like most small investors, my salary affords me a
modest living and I struggle daily to support my family. The times we live in are
quite turbulent both economically and psychologically. I do not want to think that
a handful of ruthless entrepreneurs dare to enrich their lives at the expense of
the public investor. I ask you to consider why the NASD would push so long and hard
for the current SUPER SOES system (which was their rules of reserve size and
automatic refresh requirements) and then when law makers' attention are diverted
toward a larger cause, a surreptitious attempt to fast track an unjustifiable rule
change (it is slated to begin in about two weeks!!!). At the same time they enforce !
their slap in our collective face by requiring the investor to pay one dollar to
the MM per SOES execution. Please, Mr Katz , I implore you to once again support
the public and not allow this travesty to stand. I cannot find one ounce of
justification for this proposal. It is a clear attempt to continue the organized
crime-like stronghold that certain MM use to squeeze money from the average investor.
My customers, my family and I thank you and your agency for your past input as
our acting eyes and ears and law enforcers. Only a few short years ago it was
regarded as a manipulative and deceptive practice for a MM to maintain inside
quotes for 100 shares in 1000 share tier size stocks. The reasons being similar to
the ones portrayed in my brief example. However, today we have ECNs that MM can
utilize to enter 100 share momentum thwarting orders in their favor. Can you believe
that they have the nerve to request a rule change to allow for 100 share ONLY
requirements. Your governing has certainly curtailed many fraudulent efforts and
I sincerely hope you see the hidden mockery of this so called rule change.
With Gratitude,
Neal King
Registered Representative
News 
Market Data 
Discover 
