November 17, 2005
Mr. John M. Byrne
Bloomberg Tradebook LLC
731 Lexington Avenue
New York, NY 10022
Re: The Tradebook System
Dear Mr. Byrne:
This letter extends the temporary no-action position taken by the Division of Market Regulation ("Division") on January 6, 2005 ("January Letter") until June 28, 2006. In the January Letter, the Division took the view that Bloomberg Tradebook LLC ("Tradebook" or "System") is an electronic communications network ("ECN"), as defined in Rule 600(b)(23) of Regulation NMS1 under the Securities Exchange Act of 1934 ("Act"), and would be in compliance with the requirements applicable to the ECN Display Alternative set forth in the ECN Amendment with respect to Nasdaq and exchange-listed securities for which a linkage between Tradebook and a self-regulatory organization ("SRO") is operational. Accordingly, the Division took the position in the January Letter that it would not recommend that the Securities and Exchange Commission ("Commission") take enforcement action against market makers or exchange specialists who are participants in the System, if those participants enter orders into the System without modifying their public quotations, in compliance with the ECN Display Alternative.
In extending this no-action position, the Division relied on the following representations made by Tradebook:
- Tradebook is registered with the Commission as a broker-dealer;
- Tradebook's method of operation with respect to Nasdaq and exchange-listed securities for which a linkage between Tradebook and an SRO is operational is in compliance with paragraph (b)(5)(ii) of the Quote Rule (the "ECN Display Alternative");2
- With respect to Tradebook's current linkage with Nasdaq, Tradebook (a) transmits to Nasdaq for display in Nasdaq's montage the best-priced orders entered by over-the-counter ("OTC") market makers and exchange market makers for those securities in which they make markets (or act as specialist); and (b) provides to any registered broker-dealers access to such orders displayed in Nasdaq's montage that is functionally equivalent to the access that would have been available had the market makers or specialists reflected their superior orders in their published quotations;
- With respect to any other linkage Tradebook establishes with an SRO (in addition to its current linkage with Nasdaq), Tradebook will (a) transmit to an SRO for display in the SRO's montage the best-priced orders in such securities of all orders entered by OTC market makers and exchange market makers for those securities in which they make markets (or act as specialist); and (b) provide to any broker-dealer access to such orders displayed in the SRO's montage that is functionally equivalent to the access that would have been available had the market makers or specialists reflected their superior orders in their published quotations;
- Tradebook responds to orders in securities in which it publishes its best bid and offer and associated sizes in Nasdaq's montage that are entered into the System by broker-dealers through access to Nasdaq's montage as promptly as it responds to orders entered directly to the System by subscribers and in any event in not more than a few seconds. In addition, Tradebook provides to registered broker-dealers the ability, subject to security procedures to verify the identity and authority of the caller, to execute trades by telephone against Tradebook's quotations displayed in Nasdaq's montage. The telephone desk is staffed by appropriately registered personnel;
- Tradebook intends to respond to orders in securities in which it publishes its best bid and offer and associated sizes in an SRO to which it has established a linkage (in addition to its current linkage with Nasdaq) that are received from broker-dealers through the System as promptly as it expects to respond to orders received from subscribers to execute against orders displayed in the System and in any event in not more than a few seconds. In addition, with respect to an SRO to which Tradebook has established a linkage (in addition to its current linkage with Nasdaq), Tradebook also will provide to registered broker-dealers the ability, subject to security procedures to verify the identity and authority of the caller, to execute trades by telephone against Tradebook's quotations displayed in the SRO's montage. The telephone desk will be staffed by appropriately registered personnel;
- With respect to the NASD's Alternative Display Facility ("ADF"), Tradebook allows broker-dealers the ability to effect transactions with orders in the System displayed in the ADF in accordance with NASD rules;
- In connection with its highest priced published buy orders and lowest priced sell orders, Tradebook charges broker-dealers a rate no more than the fee Tradebook charges a substantial proportion of its active broker-dealer subscribers, and in any event, will not charge more than $0.009 per share,3 plus any fee charged to Tradebook by an SRO for such trades;
- The Tradebook System has sufficient capacity to handle the volume of trading reasonably anticipated to be conducted in the System. In addition, Tradebook will conduct periodic review and testing to: (a) ensure future capacity; (b) identify potential weaknesses; and (c) reduce the risks of system failures and threats to system integrity;
- Information entered into the system will be kept confidential by employees of Tradebook or B-Trade Services LLC having access to it. Operation of the System will be kept separate from other businesses of Bloomberg L.P.; and
- Tradebook will comply with all rules of each SRO regarding use of the SRO's facilities and obligations imposed by the SRO to provide access to orders entered into the SRO's facilities.
The Division conditions its position on the continuing accuracy of these representations and compliance by Tradebook with all applicable Commission and SRO rules, including any additional requirements applicable to ECNs. Any different facts or conditions - including but not limited to modifications or revisions to, or expansion of service provided by, Tradebook - may require a different response. The Division may request additional representations from you regarding the operation of Tradebook. This no-action position is subject to changes in current law, regulation, and interpretations; any such change may require the Division to reevaluate and withdraw or modify this position. This no-action position concerns enforcement action under Section 11A of the Act only, and does not express any legal conclusions regarding the applicability of Section 11A or other statutory or regulatory provisions of the federal securities laws.
Compliance with the ECN Display Alternative depends in many respects on the practical effect of the operational conditions established by Tradebook and the manner of operation of the linkage between Tradebook and the SRO or ADF. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
Michael J. Gaw
The Incoming Letter is in Acrobat format.