July 25, 2002
Re: Enforcement of NASD Rules 6950 through 6957
Dear Mr. Menchel:
In a April 2, 2002 letter, the National Association of Securities Dealers ("NASD") requests that the Division of Market Regulation provide assurances that it will not recommend enforcement action to the Commission if the NASD does not enforce NASD Order Audit Trail Rules 6950 through 6957 (the "OATS Rules") with respect to trades involving Bloomberg Tradebook LLC ("Tradebook") and B-Trade Services LLC ("B-Trade"), which are both registered broker-dealers and NASD members.
In connection with this request, you have represented that Tradebook operates the Bloomberg Tradebook electronic communications network (the "Bloomberg ECN"), which matches limit orders in Nasdaq and listed equities on a confidential basis. Tradebook receives participants' electronic orders matched on the Bloomberg ECN and, on an agency basis, introduces the orders to B-Trade for execution. B-Trade then acts as the execution and comparison broker for the participants of the Bloomberg ECN that are broker-dealers, and BNY ESI and Co., Inc., an affiliate of B-Trade, acts as the settlement broker for such participants and as the fully-disclosed carrying and clearing broker for non-broker-dealer participants.
Under the Commission's August 8, 1996 Order,1 the NASD is required to have an accurate, time-sequenced record of orders and transactions from the receipt of an order through its execution. To comply with this requirement, the NASD adopted the OATS Rules.2 Pursuant to the OATS Rules, each member receiving an order must submit various applicable OATS reports. Under a strict reading of the OATS Rules, Tradebook would be required to submit a New Order Report for each order received by the Bloomberg ECN. In addition, if Tradebook matches two orders and sends them to B-Trade for execution, Tradebook would be required under the OATS Rules to submit a Routing Report for both orders and B-Trade would be required to submit a New Order Report for each of the two orders received from Tradebook.
You have represented, however, that, after the adoption of the Commission's Order Execution Rules, Rule 11Ac1-4 and Rule 11Ac1-1 under the Securities Exchange Act of 1934 ("Exchange Act"), Tradebook, B-Trade and Nasdaq agreed that the Bloomberg ECN would interface with Nasdaq's execution systems and would post orders in Nasdaq securities using B-Trade's Market Participant ID ("MPID"), which is "BTRD." Accordingly, all executions through or involving the Bloomberg ECN are reported to the Automated Confirmation Transaction Service ("ACT") under B-Trade's MPID. For example, an order routed to the Bloomberg ECN is reported to OATS by Tradebook as an order received by B-Trade. Similarly, when other members route orders to the Bloomberg ECN, they submit Routing Reports showing that the orders were routed to B-Trade.
You further represent that: (1) all orders routed through the Bloomberg ECN are executed by B-Trade; (2) Tradebook does not route orders to any broker-dealer other than B-Trade; and (3) B-Trade executes orders only on behalf of Bloomberg ECN and Tradebook. As such, you state that the current OATS reporting by Tradebook does not impair the staff's ability to create an accurate and complete, time-sequenced record of orders and transactions in Nasdaq securities. You further believe that strict compliance with OATS Rules would result in duplicative OATS reporting by Tradebook and B-Trade, without providing any additional regulatory information.
On the basis of the representations contained in your April 2, 2002 letter that the NASD and NASD Regulation are able to obtain an accurate and complete, time-sequenced record of orders and transactions in Nasdaq securities by Tradebook and B-Trade as required by the SEC Order, the Division will not recommend that the Commission take enforcement action if the NASD and NASD Regulation do not enforce compliance with the OATS Rules by both Tradebook and B-Trade for the same orders. The Division conditions its position on the continuing exclusivity of the relationship between Tradebook, B-Trade, and the Bloomberg ECN: i.e., (1) all orders routed through the Bloomberg ECN continue to be executed only by B-Trade; (2) Tradebook continues to route orders only to B-Trade; and (3) B-Trade continues to execute orders only on behalf of Bloomberg ECN and Tradebook.
This no-action position regards enforcement action under Section 19(g) of the Exchange Act only, and does not express legal conclusions regarding the applicability of Section 19(g) 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.
Robert L.D. Colby
cc: Patrice M. Gliniecki
Incoming LetterThe incoming letter is attached in PDF format.