June 28, 2006
C. Thomas Richardson
Re: OnTrade 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 OnTrade ECN ("System"), owned and operated by OnTrade, Inc. ("OnTrade"),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 January 2006 no-action letter.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) The System is an ECN within the meaning of Rule 600(b)(23) of Regulation NMS and allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in NMS stocks.
(ii) OnTrade will maintain a linkage with at least one SRO trading facility9 or SRO display-only facility10 and: (a) transmit to such SRO trading facility or SRO display-only facility for display either the best priced orders of those orders entered by OTC market makers and exchange market makers for those securities in which they make markets (or act as specialists) or the best priced orders entered by all ECN subscribers; and (b) provide, to any broker or dealer, access to such orders that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility or, for orders displayed in an SRO display-only 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.
(iii) OnTrade responds, and intends to continue to respond, to orders by non-subscribers as promptly as it responds to orders by subscribers. Non-subscribers will be able to automatically execute against quotations displayed by the System.
(iv) OnTrade will charge non-subscriber broker-dealers a rate that does not exceed the then-current rate charged to a substantial portion of its active broker-dealer subscribers, and in any event, no more than the maximum fee permitted by Rule 610 of Regulation NMS.11
(v) The System has sufficient capacity to handle the volume of trading reasonably anticipated to be conducted in the System. In addition, OnTrade will conduct regular periodic System capacity reviews and tests to: (a) ensure future capacity, (b) identify potential weaknesses, and (c) reduce the risks of system failures and threats to system integrity.
The Division's no-action position is conditioned on OnTrade maintaining active connectivity with one or more SRO trading facilities or SRO display-only facilities. In the event that OnTrade loses connectivity with any SRO trading facility or SRO display-only facility, OnTrade, 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. OnTrade represents that it continuously and systematically monitors its connections to SRO trading facilities and/or SRO display-only facilities. OnTrade further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, OnTrade 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 OnTrade 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, OnTrade - 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 Act12 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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