June 28, 2006
Karen P. Mohr, Esq.
Re: Direct Edge ECN
In your letter dated June 28, 2006, you requested that the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") reaffirm its view that Direct Edge ECN ("System"), owned and operated by Direct Edge ECN LLC ("Direct Edge LLC"),1 is an electronic communications network ("ECN") as defined in Regulation NMS2 under the Securities Exchange Act of 1934 ("Exchange Act") and would be in compliance with the requirements applicable to the ECN Display Alternative, as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule"),3 with respect to NMS stocks4 for which a linkage between the System and a self-regulatory organization ("SRO") is operational. The Division has previously taken that view in a number of no-action letters, most recently in March 2006.5
The Division hereby grants your request. Accordingly, the Division will not recommend that the Commission take enforcement action against OTC market makers6 or exchange market makers7 who are participants in the System, if those market makers enter orders into the System without modifying their public quotations, in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"),8 as applicable. In taking this position, the Division has relied on various representations you made regarding the operation of the System, specifically that:
(i) Direct Edge LLC is registered with the SEC as a broker-dealer under Section 15 of the Exchange Act and is a member of the NASD and the National Stock Exchange. Direct Edge LLC operates an alternative trading system known as the Direct Edge ECN pursuant to Regulation ATS9 under the Exchange Act. The System is an "electronic communications network" as defined in Regulation NMS,10 and permits OTC market maker and exchange market maker subscribers electronically to enter orders in NMS stocks directly into the Direct Edge ECN order book.
(ii) Direct Edge LLC has established and will maintain an automated linkage with one or more SRO trading facilities11 and/or SRO display-only facilities12 and provides to such SRO trading facilities and/or SRO display-only facilities the "top of book," i.e., best bid/ask by time priority, aggregated by choice of display venue and security symbol for all orders displayed to more than one subscriber in the Direct Edge ECN order book for inclusion in the quotation data made available by such SRO trading facilities and/or SRO display-only facilities to vendors pursuant to the Quote Rule.
(iii) The System accepts only orders that can be automatically executed pursuant to their terms and will not post any "manual quotations."13
(iv) Non-subscriber broker-dealers that have access to an SRO trading facility and/or SRO display-only facility are able to: (i) view the "top of the book" quotes of the System displayed through such SRO trading facility or SRO display-only facility; and (ii) effect a transaction against the quotes contained in: (a) an SRO trading facility montage, via such SRO trading facility's platform; or (b) an SRO display-only facility, either via an SRO trading facility's platform (assuming any quote entered in an SRO display-only facility is also displayed in the SRO trading facility), or through a private linkage system between such non-subscriber broker-dealer and the System. Direct Edge LLC will provide to such non-subscriber broker-dealers: (A) for System quotes displayed on an SRO trading facility, access to such quotes that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility, or (B) for System quotes displayed in an SRO display-only trading facility, a level and cost of access to such quotations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock, respectively.
(v) Direct Edge LLC responds to orders entered into the System through access to an SRO trading facility, or through a private linkage system to the System for quotes displayed in an SRO display-only facility, no slower than the System responds to orders entered directly by subscribers into the Direct Edge ECN book.
(vi) Direct Edge LLC charges non-subscriber broker-dealers a rate no more than the fee Direct Edge LLC charges a substantial portion of its active broker-dealer subscribers, plus any fee charged to Direct Edge LLC by an SRO trading facility or SRO display-only facility. Direct Edge LLC will comply with the applicable fee limitations for non-subscriber broker-dealers pursuant to Regulation NMS.14
(vii) The System has sufficient capacity to handle the volume of data reasonably anticipated to be conducted in the System. Direct Edge LLC conducts periodic reviews and testing to: (i) ensure future capacity; (ii) identify potential weaknesses; and (iii) reduce the risks of system failures and threats to system integrity.
The Division's no-action position is conditioned on Direct Edge LLC maintaining active connectivity with one or more SRO trading facilities or SRO display-only facilities. In the event that Direct Edge LLC loses connectivity with an SRO trading facility or SRO display-only facility, Direct Edge LLC, with respect to that facility, would not be in compliance with the ECN Display Alternative and the no-action relief described herein would not be available. Direct Edge LLC represents that it continuously and systematically monitors its connections to SRO trading facilities and/or SRO display-only facilities. Direct Edge LLC further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, Direct Edge LLC personnel will immediately cancel all quotes previously published by the System in that facility and notify its subscribers to advise them of such interruption.
The Division further conditions its position on the continuing accuracy of these representations and compliance by Direct Edge LLC 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, Direct Edge LLC - may require a different response. The Division may request additional representations from you regarding the operation of the System. 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 Exchange Act15 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.
Robert L.D. Colby
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