Request for Rulemaking under the Securities Exchange Act of 1934 to Adopt New Rule 11Ac1-8 To Address the Practices of Trading-Through and Locking or Crossing OTC Quotes Across Separate Market Centers

4/14/2003

Mr. Jonathon Katz
Secretary
United States Securities and Exchange Commission
450 5^th Street N. W.
Washington, D.C. 20549

Re: Petition for Rulemaking

Dear Mr. Katz:

NexTrade Holdings Inc., the parent company of NexTrade, Inc. ("NexTrade"), which owns and operates the NexTrade ECN, hereby petitions the Securities and Exchange Commission ("Commission")¹ to adopt new Rule 11Ac1-8 pursuant to Section 11A of the Securities Exchange Act of 1934 ("Exchange Act") to address serious flaws in the integrity of market structure; the practices of trading-through and locking or crossing OTC quotes across separate market centers. Specifically, NexTrade requests that the Commission propose and adopt the attached Rule 11Ac1-8 or a substantially similar rule, to eliminate the practice of exchanges, market participants, ECNs and ATSs trading-through or locking and crossing previous OTC limit orders displayed in accordance with SEC Rule 11Ac1-4. Additionally, NexTrade hereby petitions the Commission to amend rule 11Ac1-4 to address market center access fees in order to reduce the economic incentive of market centers to trade-through and lock or cross previous OTC limit orders displayed in accordance with SEC Rule 11Ac1-4.

As the Commission knows, NexTrade has submitted that the Alternative Display Facility ("ADF") is dysfunctional to the point of failure. NexTrade has argued that the core flaw of the ADF rests in Rule 4300, which has forced the ADF to attempt to operate as an allegedly viable exchange without an execution mechanism. During the approval process of the ADF, NexTrade warned the Commission that the current network of interconnectivity between brokerage firms had not propagated sufficiently to allow smaller firms the ability to satisfy their obligations under the Act if such firms choose to operate in the ADF.

Since NexTrade's launch date in the ADF, December 23, 2002, NexTrade has validated all of its warnings to the Commission about the ADF's non-viability. Most of the trades NexTrade executes in the ADF are conducted at inferior prices to the NBBO. Nearly all of the quotes NexTrade posts to the ADF end up being locked or crossed prior to execution. As a consequence, customers using NexTrade through ADF are not receiving Best Execution protection on their trades. Ultimately, this inability to provide Best Execution will lead to the failure of NexTrade, other ECNs, market participants, and the ADF, ultimately to the detriment of the American investor.

Unfortunately, the flaws of the ADF are being exacerbated by the continuing evolution of the OTC market structure. Prior to the threatened launch of SuperMontage, the OTC market liquidity was largely concentrated in the Nasdaq. However, since the Nasdaq made the decision to compete against its members and launch the for-profit ATS (and eventually a for-profit exchange), SuperMontage, most of the liquidity has fled to other market centers. In today's OTC marketplace, participants send their liquidity to any of six distinct market centers, none of which are bound by a common trade rule that would otherwise prevent trade-throughs and locked or crossed markets.

Moreover, the problems of trade-throughs and locked or crossed markets are further fueled by the nearly universal fee structures of the existing market centers, which all pay market participants to add liquidity while charging to subtract liquidity. As a result of this common structure, it is far better, economically, for a market participant to lock or cross another quote in order to add liquidity rather than subtract liquidity. For example, if a market center rebates $.005 per share for adding liquidity while another market center charges $.009 per share for subtracting liquidity, the difference to the market participant that manages to deftly circumnavigate these different centers is $.014 per share. In light of the very tough times in the market, and the apparent total disregard from the SROs regarding Best Execution across market centers, market participants are highly motivated to put the bottom line in front of getting the best price for individual investors.

Indeed, the Nasdaq recently issued a white paper that stated, "There is currently a regulatory crisis facing the markets that trade NASDAQ securities... NASDAQ believes that the current system for overseeing trading in NASDAQ securities, although adequate when NASDAQ was the sole center of liquidity, is now left with holes that grow larger by the day. Many markets have begun to trade NASDAQ securities for the first time within the past few months and have entered the market without the necessary resources or rules to maintain adequate regulatory infrastructures properly to surveil trading."² From NexTrade's perspective, while the motives behind such admission of inadequacy may have been derived from NASD's apparent desire to "rule the regulatory world," the Commission must take such an admission seriously and recognize that it must take action because the SROs will not take the necessary action without guidance from the Commission, in particular when it is against their own interests.

To assist the Commission in resolving these expanding problems, NexTrade has crafted a proposed rule to prevent trade-throughs and locked or crossed markets similar to the existing rules of NASD members for the Listed market. However, NexTrade's proposed rule has been modernized to eliminate the problems associated with the Listed version of the trade-through rules, mainly the disparity of processing speed between market centers. Additionally, NexTrade has proposed an amendment to Rule 11Ac1-4 to eliminate the economic incentive of firms to lock or cross market centers.

NexTrade believes that adoption of its proposed rules would further the goals of the Commission under the Act. NexTrade believes the proposed rules are drafted in a manner to effectuate their intended purposes.

NexTrade appreciates the Commission's consideration of our request and urges the Commission to take action to adopt these rules as quickly as possible. If you have any questions, or would like to discuss these matters in greater detail, please contact the undersigned at (727)446-6660 Ext 122.

Sincerely,

John M. Schaible
President NexTrade Holdings, Inc.

JMS/js

Cc: The Honorable William H. Donaldson, Chairman
The Honorable Paul S. Atkins, Commissioner
The Honorable Roel C. Campos, Commissioner
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
Annette L. Nazareth, Director, Division of Market Regulation
Lori A. Richards, Director, OCIE
Robert L.D. Colby, Deputy Director, Division of Market Regulation
Elizabeth K. King, Associate Director, Division of Market Regulation Nancy J. Sanow, Assistant Director, Division of Market Regulation
Dr. Daniel Camaano, Esquire, Camaano & Associates

Attachment: Draft of Rule 11Ac1-8 and amendments to 11Ac1-4

_______________________

1	NexTrade submits this petition pursuant to Rule 192 of the Commission's Rules of Fair Practice 17 C.F.R 201-192
2	NASDAQ Regulation White Paper: A Call for a Fairer Allocation of Responsibilities and Costs in a Fragmented Market, January 24, 2003.

Attachment A

Proposed Amendments to 11Ac1-4, new language underlined.

1. Definitions. For purposes of this section:

   1. The term association shall mean any association of brokers and dealers registered pursuant to Section 15A of the Act.

   2. The terms best bid and best offer shall have the meaning provided in Rule 11Ac1-1(a)(3).

   3. The terms bid and offer shall have the meaning provided in Rule 11Ac1-1(a)(4).

   4. The term block size shall mean any order:

      1. Of at least 10,000 shares; or

      2. . For a quantity of stock having a market value of at least $ 200,000.

   5. The term covered security shall mean any "reported security" and any other security for which a transaction report, last sale data or quotation information is disseminated through an automated quotation system as described in section 3(a)(51)(A)(ii) of the Act.

   6. The term customer limit order shall mean an order to buy or sell a covered security at a specified price that is not for the account of either a broker or dealer; provided, however, that the term customer limit order shall include an order transmitted by a broker or dealer on behalf of a customer.

   7. The term electronic communications network shall have the meaning provided in Rule 11Ac1-1(a)(8).

   8. The term exchange-traded security shall have the meaning provided in Rule 11Ac1-1(a)(10).

   9. The term OTC market maker shall mean any dealer who holds itself out as being willing to buy from and sell to its customers, or otherwise, a covered security for its own account on a regular or continuous basis otherwise than on a national securities exchange in amounts of less than block size.

   10. The term reported security means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan.

2. Specialists and OTC market makers. For all covered securities:

   1. Each member of an exchange that is registered by that exchange as a specialist, or is authorized by that exchange to perform functions substantially similar to that of a specialist, shall publish immediately a bid or offer that reflects:

      1. The price and the full size of each customer limit order held by the specialist that is at a price that would improve the bid or offer of such specialist in such security; and

      2. The full size of each customer limit order held by the specialist that:

         1. Is priced equal to the bid or offer of such specialist for such security;

         2. Is priced equal to the national best bid or offer; and

         3. Represents more than a de minimis change in relation to the size associated with the specialist's bid or offer.

   2. Each registered broker or dealer that acts as an OTC market maker shall publish immediately a bid or offer that reflects:

      1. The price and the full size of each customer limit order held by the OTC market maker that is at a price that would improve the bid or offer of such OTC market maker in such security; and

      2. . The full size of each customer limit order held by the OTC market maker that:

         1. Is priced equal to the bid or offer of such OTC market maker for such security;

         2. Is priced equal to the national best bid or offer; and

         3. Represents more than a de minimis change in relation to the size associated with the OTC market maker's bid or offer.

3. Each registered exchange and ECN shall be permitted to charge a fee for providing brokers access provided that:

   1. The fee is no more than the fee the exchange or ECN charges a substantial proportion of its broker-dealer subscribers or broker-dealer members;

   2. The fee is charged in accordance with Rule 11Ac1-8(b)(iv) and Rule 11Ac1-8(c)(iv);

   3. The fee does not exceed maximum rates set by the Commission through law or No-Action letters.

4. Exceptions. The requirements in paragraph (b) of this section shall not apply to any customer limit order:

   1. That is executed upon receipt of the order.

   2. That is placed by a customer who expressly requests, either at the time that the order is placed or prior thereto pursuant to an individually negotiated agreement with respect to such customer's orders, that the order not be displayed.

   3. That is an odd-lot order.

   4. That is a block size order, unless a customer placing such order requests that the order be displayed.

   5. That is delivered immediately upon receipt to an exchange or association-sponsored system, or an electronic communications network that complies with the requirements of Rule 11Ac1-1(c)(5)(ii) with respect to that order.

   6. That is delivered immediately upon receipt to another exchange member or OTC market maker that complies with the requirements of this section with respect to that order.

   7. That is an "all or none" order.

5. Exemptions. The Commission may exempt from the provisions of this section, either unconditionally or on specified terms and conditions, any responsible broker or dealer, electronic communications network, exchange, or association if the Commission determines that such exemption is consistent with the public interest, the protection of investors and the removal of impediments to and perfection of the mechanism of a national market system.

Attachment B

Proposed Rule 11Ac1-8: Intermarket Trading Rules

(a) Definitions

(1) The term "ITR Participant" shall mean any market participant, exchange, ECN, or ATS engaged in the transaction of OTC stocks.

(2) The term "ITR Security" shall mean any OTC security that may be traded by one or more ITR Participant's Systems.

(3) An "ITR Market Center Trade-Through," as that term is used in this Rule, occurs whenever an ITR Participant initiates the purchase of an ITR Security by sending a commitment to trade-through any system and such commitment results in an execution at a price which is higher than the price at which the security is being offered (or initiates the sale of such a security by sending a commitment to trade-through any system and such commitment results in an execution at a price which is lower than the price at which the security is being bid for) at the time of the purchase (or sale) by another ITR Participant as reflected by the offer (bid) then being displayed by such other ITR Participant.

(4) An ITR Member that makes a bid (offer) for an ITR Security at a price which equals the displayed offering (bid) price at that time from another ITR Member has created what is referred to in this rule as a "locked market."

(5) An ITR Member that makes a bid (offer) for an ITR Security at a price which exceeds (is less than) the displayed offering (bid) price at that time from another ITR Member has created what is referred to in this rule as a "crossed market."

(b) An ITR member shall avoid purchasing or selling such security, whether as principal or agent, at a price which is lower than the bid or higher than the offer displayed from an ITR Member ("trade-through"), unless the following conditions apply:

(i) the bid or offer that is traded-through is being displayed from a Market Center whose members are relieved of their obligations under SEC Rule 11Ac1-1(C)(2) with respect to such bid or offer;

(ii) the bid or offer that is traded-through has caused a locked or crossed market in the ITR Security;

(iii) the trade-through occurs after the displayed market center failed to respond to a request to trade in under 5 seconds.

(iv) the ITR participant disregards a displayed quote by waiving its right to assess access fees and agreeing to pay the access fee, or fees, of the displayed ITR member(s) whether said displayed quote changes or is executed.

(c) An ITR member shall not cause the market to be locked or crossed unless:

(i) the issuance of the commitment to trade or order would be prohibited by SEC Rule 10a-1 under the Act;

(ii) the ITR Member sends an order to another ITR Member whose displayed price would be locked fails to respond in 5 seconds;

(iii) the ITR member whose quote would lock or cross the markets has attempted to trade with all other ITR members with prices displayed that would be locked or crossed and all other ITR members have failed to respond in 5 seconds;

(iv) the ITR participant disregards a displayed quote by waiving its right to assess access fees and agreeing to pay the access fee, or fees, of the displayed ITR member(s) whether said displayed quote changes or is executed.