October 21, 2005
Paul A. Merolla, Esq.
Re: Inet ATS, Inc.
Dear Mr. Merolla:
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 the Inet ATS, Inc. ("Inet" 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 Alternative2 with respect to Nasdaq securities for which a linkage between the System 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 OTC market makers or exchange market makers who are participants in the System, if those market makers enter orders into the System without modifying their public quotations in compliance with the ECN Display Alternative.
In taking this position, the Division relied on the representation made by Inet in its letter dated October 12, 2005, that previous representations made with respect to Inet's predecessor, Island ECN, Inc., continue to be correct.
The Division continues to condition its position on Inet's compliance with the requirement that it respond to orders entered into the System through access to an SRO no slower than Inet responds to orders entered directly into the System, and in any event in no more than a few seconds. The Division further conditions its position upon Inet having 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. Moreover, the Division conditions its position on Inet providing broker-dealers access to its quotations via either an SRO or the telephone for a charge of no more than the fee that Inet charges a substantial proportion of its active broker-dealer subscribers3, plus any fee payable to an SRO.
Finally, the Division conditions its position on Inet's compliance 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, Inet - may require a different response. The Division may request additional representations from you regarding the operation of Inet. 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 Amendment depends in many respects on the practical effect of the operational conditions established by Inet and the manner of operation of the linkage between Inet and an SRO. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
Michael J. Gaw
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