February 1, 2002
Re: BRUT System
Dear Mr. O'Brien:
In your letter, dated January 15, 2002, you request that the Division of Market Regulation extend the current no-action position regarding The BRUT ECN, LLC's ("BRUT System" or "System") activities in Nasdaq securities to include exchange-listed securities. Specifically, you request that the Division of Market Regulation confirm that BRUT System operated by BRUT, LLC ("BRUT") is an "electronic communications network" ("ECN") as defined in the amendments to the Quote Rule1 ("ECN Amendment") and the Limit Order Display Rule2 (cumulatively, "Order Execution Rules") for exchange-listed securities. You also request that the Division confirm that the BRUT System will be in compliance with the requirements under the ECN Display Alternative3 set forth in the ECN Amendment with respect to exchange-listed securities for which a linkage between the BRUT System and the Nasdaq system is operational. In addition, you request that the Division not recommend that the Commission take enforcement action under the ECN Amendment or the Limit Order Display Rule against OTC 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 Order Execution Rules.
In connection with this request, you have represented that the BRUT System complies with the ECN Display Alternative. In this regard, BRUT is currently in the process of establishing with Nasdaq an operative linkage with the Computer Assisted Execution System (the "CAES linkage"), which will provide access to all displayed best-priced System orders in exchange-listed securities. CAES serves as the NASD's interface with the Intermarket Trading System ("ITS"). In conjunction with the CAES linkage, BRUT will register as an ITS/CAES market maker and as a CQS market maker, and its best-priced orders will be publicly disseminated.
You also represent that BRUT will allow broker-dealers the ability to effect transactions with orders in the BRUT System via the CAES linkage or through a telephone desk staffed by employees who meet applicable NASD qualification standards. You represent that BRUT will not charge fees to non-subscriber broker-dealers for access to the System through the CAES/ITS linkage.
On the basis of the representations contained in your both your January 15, 2002 letter and your January 22, 1998 letter, the Division confirms that the System is an ECN for exchange-listed securities as defined in the Order Execution Rules. The Division also preliminarily believes that the BRUT System will be in compliance with the requirements under the ECN Display Alternative set forth in the ECN Amendment with respect to exchange-listed securities for which a linkage between the BRUT System and ITS/CAES is operational.4 Accordingly, the Division will not recommend that the Commission take enforcement action under the ECN Amendment or the Limit Order Display Rule against OTC market makers or exchange specialists who are participants in the BRUT System, if those participants enter orders into the BRUT System without modifying their public quotations in compliance with the Order Execution Rules.
The Division conditions its position on compliance by the System with the non-discrimination provisions of the Addendum to the Nasdaq Workstation II Subscriber Agreement (i.e., Section 2, Response Time). The Division notes that compliance with the ECN Amendment depends in many respects on the practical effect of the operational conditions established by the BRUT System and the manner of the operation of the linkage between the BRUT System and Nasdaq. Therefore, the Division is limiting its assurances regarding compliance with the ECN Amendment and the ECN Display Alternative and the Division's no-action relief to the period ending March 31, 2002.
The Division further conditions its position upon your representation in your letter that the BRUT System has sufficient capacity to handle the volume of trading reasonably anticipated in its System. Such capacity should be ensured through periodic review and testing to (1) ensure future capacity, (2) identify potential weaknesses, and (3) reduce the risks of system failures and threats to system integrity. The Division may, in the process of its continuing review of ECNs, request records from the BRUT System regarding such reviews and tests. In addition, the Division may request additional representations from the BRUT System regarding the operation of the BRUT System.
The Division further conditions its position upon your representation that the trading information entered into the BRUT System will be kept confidential by those employees of BRUT having access to it, and that the operation of the System will be kept separate from the other business of BRUT. The Division, in the process of its continuing review of ECNs, may request records concerning procedures addressing these issues. Further, the Division will consider extending or modifying its temporary no-action position prior to March 31, 2002, based on its continuing experience with the operation of the ECN Display Alternative.
The Division further conditions its position upon BRUT's compliance with all terms and conditions, as applicable, of the Commission's November 13, 1998 letter to BRUT regarding Nasdaq securities.
This no-action position regards enforcement action under Section 11A of the Exchange Act only, and does not express legal conclusions regarding the applicability of Section 11A of the Exchange Act or other statutory or regulatory provisions of the federal securities laws. This no-action position is also based solely on the representations you have made. Any different facts or conditions might require a different response. 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.