October 21, 2005
Karen P. Mohr
Dear Ms. Mohr:
In your letter of October 20, 2005, you inform us that Knight Capital Group, Inc. has formed an indirect, wholly owned subsidiary Direct Edge ECN LLC ("Direct Edge LLC") to acquire substantially all of the assets and assume certain liabilities related to the electronic communications network ("ECN") known as ATTAIN ECN ("ATTAIN ECN") from Domestic Securities, Inc. and certain of its affiliates and shareholders. You also represent that Direct Edge LLC is registered as a broker-dealer with the U.S. Securities and Exchange Commission ("Commission").
The Commission's Division of Market Regulation ( "Division") has previously taken the position that The ATTAIN ECN is an ECN as defined in the "ECN Amendment" to the Quote Rule1 and the Limit Order Display Rule2 (collectively the "Order Execution Rules") under the Securities Exchange Act of 1934, as amended ("Act"). The Division has stated that it would not recommend that the Commission take enforcement action against Nasdaq market makers who are participants in the ATTAIN ECN if those market makers enter orders into the ATTAIN ECN without modifying their public quotation, in compliance with the ECN Display Alternative. The Division set forth this position in a series of no-action letters, the first issued on February 4, 1998, and extended most recently on October 7, 2005.
You represent that upon consummation of the acquisition, Direct Edge LLC will rebrand ATTAIN ECN as the "Direct Edge ECN" and operate the "Direct Edge ECN" in substantially the same manner as the ATTAIN ECN, i.e., as an ECN in Nasdaq National Market and SmallCap Market securities (collectively, "Nasdaq Securities") pursuant to the rules of one or more national securities exchanges or national securities associations (collectively, "SROs").
In your letter, you request that the Division advise Direct Edge LLC that:
The Division hereby grants your request. Accordingly, the Division takes the position that upon consummation of Direct Edge LLC's acquisition of ATTAIN ECN, Direct Edge ECN will be an "electronic communications network" as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that Direct Edge ECN will be in compliance with the requirements applicable to the ECN Display Alternative set forth in the ECN Amendment6 with respect to Nasdaq Securities for which a linkage between Direct Edge ECN and an SRO or the ADF is operational and Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division will not recommend that the Commission take enforcement action under the ECN Amendment or the Limit Order Display Rules against any OTC market maker or exchange market maker (as such terms are defined in the Order Execution Rules) for entry into the Direct Edge ECN of: (i) orders without modifying their public quotations in compliance with the ECN Display Alternative and (ii) customer limit orders, in compliance with the Limit Order Display Rule. In taking this position, the Division relied on the following representations made in your letter of October 20, 2005:
The Division 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 ECN - may require a different response. The Division may request additional representations from you regarding the operation of Direct Edge ECN. 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 Securities Exchange Act of 1934 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 Direct Edge ECN and the manner of operation of the linkage between Direct Edge ECN and the SRO or members of the ADF. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
Upon consummation of Direct Edge LLC's acquisition of ATTAIN ECN, the Division's no-action position with respect to ATTAIN ECN is withdrawn.
Michael J. Gaw
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