August 22, 2002
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Mr. Jonathan Katz, Secretary
Re: SEC File No. SR-NASD-2002-97
Ladies and Gentlemen:
Bloomberg Tradebook LLC ("Bloomberg Tradebook")1 appreciates the opportunity to comment, in response to the request by the Securities and Exchange Commission (the "Commission") in Securities Exchange Act Release No. 46249 (July 24, 2002) (the "ADF Pilot Proposal Release") approving the Alternative Display Facility ("ADF") of NASD, Inc. ("NASD") for Nasdaq stocks for a nine-month pilot period (the "ADF Pilot") to expire at the close of daily operation of the ADF Pilot on April 24, 2003.
As one of the first firms to fully convert to participation in SuperMontage, Bloomberg Tradebook supports the ADF Pilot. We believe the guidance provided by the Commission's Division of Market Regulation to The Nasdaq Stock Market Inc. ("Nasdaq") regarding the Vendor Display Rule assures market participants that, in future when vendors are required to comply with it, the ADF will not be a hidden market.2 Above all, we believe the Commission was correct in concluding that a viable ADF should be a pre-condition to the launch of SuperMontage since a viable ADF would promote competition and provide investor choice. The ADF is a natural extension of the program that began with the Commission's Order Execution Rules3 and that continues to benefit all investors.4
On August 8, 2002, two days after NASD issued final specifications for the ADF, we issued a press release announcing our willingness to participate in the ADF. That made us the first ECN to announce such a commitment for the over-the-counter ("OTC") market. Notwithstanding our commitment, we note that the ADF remains a work in progress, with an as-yet-unrealized potential.
The ADF is not yet up and running and will not be for a period of, we estimate, at least three or four months from now. It will take at least that long for market participants to establish connectivity, build an interface to the ADF and begin quoting. That is not the result of intransigence or lack of commitment by the market participants. It is the result of NASD's failure to provide necessary information concerning the technical specifications. As a result, the ADF is a fine idea, one we have supported from its inception, but not yet a reality.
Nasdaq has committed millions of dollars to developing and implementing SuperMontage, but NASD has not made any similar commitment to the ADF. Attached to this letter is a time line showing the development of the ADF. The time line shows that technical specifications necessary for participation in the ADF were not available until August 6, 2002. It also shows that NASD did not push the ADF forward on the same schedule as SuperMontage and that there were a number of outstanding issues, including both technical specifications and the implications of the Vendor Display Rule, that were only recently addressed.
Significantly, as NASD and Nasdaq designed it, the ADF was to be a hidden market. Market participants could have chosen to display their quotations on the ADF, but no provision had been made for the market to see those quotations. Given those infirmities in the ADF, potential participants faced serious disincentives to committing resources to ADF participation. In its letter of July 23, 2002 to Nasdaq, the Division of Market Regulation took a major step toward resolving the "hidden market" problem with interpretive guidance under the Vendor Display Rule. In that letter, the Division notified market data vendors that they would have to display ADF quotations along with SuperMontage quotations, in the same montage. Nevertheless, the Division permitted data vendors a grace period of "a reasonable time," to adapt to the new interpretation, during which no provision was made for a unified montage. We think the resulting gap is a problem, one that would seriously damage the ADF's viability but that could be resolved if the Commission were to require NASD and Nasdaq in the interim to make available to vendors an integrated data feed, identifying the quoting participants in the ADF, as the Division called for in its letter.
The Commission correctly concluding that a viable ADF is needed as a pre-condition to launch SuperMontage if, from the time of its launch, SuperMontage is to be "entirely voluntary".5 Today, a principal concern is that the anticompetitive principles embedded in the rules and fees of SuperMontage threaten the independence of the ADF and may prevent it from ever becoming a viable facility.
Actions Needed. As stated above, we estimate that, assuming NASD and Nasdaq are committed to making the ADF a reality, it would take three to four months to make ADF sufficiently functional to operate reasonably reliably, with adequate connectivity for us and for other participants to begin quoting. We also believe that, for the ADF to offer meaningful competition to Nasdaq's SuperMontage, some revisions will be necessary in the interim: (i) the Commission should direct Nasdaq to develop a unified feed combining Nasdaq SuperMontage quotations and ADF quotations, with full identification of the quotation sources, during the period before data vendors can develop their own combined feeds, in compliance with the Division of Market Regulation's guidance under the Vendor Display Rule, discussed below; (ii) the Commission should direct Nasdaq to obey on the condition the Commission imposed in approving SuperMontage to provide a real-time data feed, and not the currently planned three-to-five second delay on "Total View" data so that the data are fully competitive with the SuperMontage data and equally usable by market participants; and (iii) the Commission should ensure that Nasdaq is not permitted to put into effect unfairly discriminatory pricing for access to and use of the SuperMontage, as described more fully below. Finally, we respectfully recommend that the Commission revisit and seek to resolve NASD's conflict of interest as owner of both the ADF and Nasdaq and regulator of both facilities. A credible and impartial regulator is essential to fair, orderly and truly competitive markets.
The basic goals of the Order Execution Rules, adopted by the Commission in 1996,6 were to increase market transparency and to provide fair and equal access to liquidity that previously had been available only to participants in private systems. As noted above, the Order Execution Rules have clearly benefited investors. The Order Execution Rules led to the creation of multiple ECNs and improvements in the Nasdaq order-routing protocols. As a result of those favorable market structure developments and the resulting action of free market forces, competition increased and explicit transactional costs went down for investors. At the same time, and more importantly, improvements in market structure led to dramatic decreases in the implicit costs of transacting in the public market for Nasdaq securities.7
The market structure implications of decimalization should not be underestimated. Orders being executed in the market place used to be executed at the "inside" NBBO, but increasingly today such orders are being executed beyond the NBBO, given the relatively smaller size available at the inside NBBO and the unimportance of capturing the last penny in price. As a result, liquidity and transparency at prices beyond the NBBO have become much more important today than ever before. ECNs are largely responsible for providing market participants with transparency and access to liquidity beyond the NBBO.
SuperMontage was a delayed reaction. It was only once ECNs captured almost 50% of the market in Nasdaq securities that Nasdaq began to feel the heat of competition. To the extent SuperMontage responds to the need for greater market information, that is, greater "transparency", it is a positive step, but the benefits of access to greater depth-of-market information should not come at the expense of competition and investor choice. As explained below, our concern is that SuperMontage will do harm by depriving investors and other market participants of choice in execution venue by monopolizing order flow and penalizing those who would attempt to escape the order-aggregation and monopolistic order-execution engine embedded within SuperMontage. Today, private vendors and trade order management systems aggregate information and trading opportunities on the desktop. This information today already consists of the ECN limit order books. Had Nasdaq wished to make a real contribution, it could have asked its market maker members to provide the same transparency and access to liquidity beyond the NBBO that ECNs have provided to their participants. Instead, Nasdaq is in pursuit of spreading its wings to draw ECN data into its SuperMontage and to "CLOB" the market. In that way, it would perfect its monopoly, kill competition and deprive market participants of choice. The ADF could be an antidote, but only if it is allowed to grow freely in response to market forces.
The Commission viewed a viable ADF as a necessary pre-condition to the launch of SuperMontage. Nasdaq did four months of internal testing and three to four months of external testing to ensure that SuperMontage could be rolled out successfully. By contrast, NASD took from January 2001 to August 2002 before producing final specifications that would allow market participants to begin the development process of quoting in the ADF. As noted above, we estimate that it will take at least three to four months, assuming full cooperation on the part of NASD before the first quotations can be displayed in real time. Had NASD approached the ADF with the same degree of seriousness as Nasdaq approached SuperMontage, it may well have been a robust facility by this time that would have offered multiple market participants an alternative quotation venue of choice. The Commission should not allow SuperMontage to go forward until that basic condition has been satisfied.
A condition to the launch of SuperMontage was the creation of an NQDS Prime data fee that would offer on a real-time basis, data identifying quoting participants below the top of file. The successor to NQDS Prime, known as the "Total View" data feed, currently runs three to five seconds late. Regardless of whether this time lag is deliberate or simply a failure to devote adequate resources, it makes Total View inadequate for market participants who wish to design their own execution algorithms or to direct orders for routing and execution purposes. Essentially, the time lag kills choice and renders Nasdaq's SuperMontage the only gateway to liquidity, and the competitive dynamics are not present.
In addition, until the requirement set forth in the Division of Market Regulation's July 23 letter can be achieved, and a non-discriminatory montage showing both SuperMontage quotations and ADF quotations is mandated in fact, the ADF will be a stepchild. The Commission should mandate that, in the interim before vendors can develop the necessary programming, Nasdaq and NASD should publish the requisite combined montage for distribution by the Vendors.
The Commission should address the other competitive barriers that stand in the way of a free and open market in Nasdaq stocks, barriers erected by Nasdaq to perfect its monopoly and preserve its ability to continue to collect monopoly rents. These are described below.
SuperMontage Fees Are Unfairly Discriminatory.
SuperMontage fees differentiate between order types in a way that is both unfair and discriminatory. The ability to send either a "Preferenced Order" or a "Directed Order" is an essential element of the SuperMontage system. In Nasdaq's nomenclature, a "Preferenced Order" is an order sent to a specific market participant that has a quotation displayed in SuperMontage at the best bid or offer. A Preferenced Order is executed through use of the SuperMontage execution algorithm. A "Directed Order" is an order sent to a specific order-delivery market participant that has a quotation displayed in SuperMontage, regardless of whether that quotation is at the best bid or offer. A Directed Order is executed by the order-delivery participant.8
Nasdaq's SuperMontage fees are unfair and discriminate against market participants in two ways.9 First, Nasdaq imposes a penalty of 150% on orders directed to ECNs or other participants that are permitted to accept order delivery rather than automatic executions and that elect to do so. The higher fees for Directed Order execution create a great disincentive to market participants to use Directed Orders at all. The fee is 25 cents per 100 shares to execute a Directed Order versus 10 cents per 100 shares to execute a Preferenced Order against an ECN. Second, by charging 150% more for Directed Orders than for orders executed using the SuperMontage algorithm, the fee structure penalizes ECNs and other market participants that wish to use their own trading algorithms to access liquidity on the SuperMontage screen via Directed Orders. These deliberately discriminatory fees would force orders into SuperMontage's execution algorithm and restrict market participants from having equal access to all avenues of execution.
Effectively, the proposed fees impose a penalty on NASD members that use alternatives to SuperMontage. By increasing the cost of using facilities other than SuperMontage, the SuperMontage fees compel NASD members to keep their trading volume on SuperMontage and discourage them from using the ADF or other alternatives to SuperMontage.
Nasdaq Uses its Fee Structures to Discourage Competition.
A telling example of Nasdaq's approach to the use of fees to suppress competition is Nasdaq's pending pricing proposal for SuperSOES, its current order-execution system that calls for Full Contribution Members to pay lower fees than Partial Contribution Members.10 The Nasdaq SuperSOES pricing proposal defines Full Contribution Members as NASD members that report to Nasdaq at least 95% of their trades in Nasdaq securities for the preceding month. Partial Contribution Members are defined as NASD members that report to Nasdaq less than 95% of their trades in Nasdaq securities for the preceding month. The proposed SuperSOES pricing scheme calls for Full Contribution Members to pay lower Nasdaq access fees than Partial Contribution Members. That access fee differential amounts to an all-but-exclusive-dealing scheme, for it would punish NASD members if they did more than de minimis business on the ADF, or indeed on any trading facility other than Nasdaq. We expect Nasdaq intends to apply the same or similar discriminatory pricing to participants of SuperMontage, in effect using SuperMontage fees to further discourage participation in the ADF.
As originally proposed, SuperSOES pricing would offer high-volume participants a share in Nasdaq's market-data revenues. The Commission recently abrogated Nasdaq's market data revenue share plans, together with similar plans offered by the Cincinnati Stock Exchange and the Pacific Exchange.11 What remains of the SuperSOES pricing proposal is a combination of rebates and access fees that discriminate between Full Contribution Members and Partial Contribution Members. Together, they work to deter use of facilities other than facilities of Nasdaq.
Executing a 10,000-share order via SuperSOES originally was priced at $0.90. Under the current SuperSOES fee proposal the same order would cost $20.10, or more than twenty-two times the original SuperSOES fee. The SuperSOES pricing proposal offers a rebate for liquidity providers, but the proposed rebate would offer little relief to Partial Contribution Members and virtually none to ECNs. Under Nasdaq's proposed rule changes, rebates would be available only to liquidity providers that participate in SuperSOES and that do not charge an access fee to market participants accessing their quotations through SuperSOES. ECNs that accept Nasdaq executions via SelectNet rather than SuperSOES would be ineligible for the proposed liquidity rebates. In addition, the proposed rule would reduce the liquidity-provider rebates available to those Nasdaq users that are not Full Contribution Members. Partial Contribution Members would pay order-execution charges and quotation-update fees that are 50% and 300% higher, respectively, and receive liquidity provider rebates 50% lower, as compared to Full Contribution Members.
We believe the Commission should revisit the combination of liquidity rebates and differential access fees in the SuperSOES proposal, in which Nasdaq uses a fee structure to penalize market participants who take their business outside of Nasdaq facilities. Nasdaq states in the release setting forth the SuperSOES pricing proposal that "Nasdaq will file a new pricing structure for its SuperMontage system . . . . Certain aspects of the new pricing structure . . . may resemble the current structure."12 The SuperSOES pricing proposal itself indicates a clear policy preference on the part of Nasdaq to use its fee structure to stifle competition. Nasdaq's equivocal statement in the SuperSOES proposal provides neither certainty nor comfort that it will not apply a similar system of discriminatory access fees and rebates in SuperMontage to discourage participation in the ADF. We believe it is imperative that the Commission take steps to ensure that Nasdaq not use the SuperMontage fee structure to suppress or retard the development of a viable ADF or to achieve other improper ends.
SuperMontage Rules Discriminate Against ECNs.
As currently configured, SuperMontage offers participants a choice of three algorithms for the placement of orders entered on the system, price/time, price/size and price/access fees. One of these, the price/access fees algorithm, puts ECNs last in line if they charge access fees. Nasdaq has argued that the price/access fees algorithm is justified on the basis that the price received or paid by a market participant in routing orders to an ECN is affected by access fees. That argument had some persuasive force when Nasdaq charged only de minimis service fees. The argument fails today, however, since ECNs are no longer the only ones to charge access fees-indeed, under SuperMontage all are tolled, for Nasdaq currently charges an access fee of 20 cents per 100 shares for use of SuperMontage, which is greater than the access fees charged by some ECNs. Accordingly, Nasdaq itself should be subject to the price/access fees algorithm and should join the ECNs at the back of the line if the price/access fees algorithm is not scrapped entirely.
While Bloomberg Tradebook has repeatedly stated that it would be pleased to see the elimination of access fees, it believes that while they are in place Nasdaq should not be permitted in the SuperMontage price/access fee algorithm to adjust only ECN quotations, not SuperMontage quotations. As currently configured, the SuperMontage price/access fee algorithm is unfairly discriminatory and anticompetitive.
NASD Is Not Independent of Nasdaq.
A more serious, long-term problem is the fact that NASD and Nasdaq are not truly independent and there is no real plan to change that. NASD's failure to develop the ADF into a viable competitor of Nasdaq perhaps should surprise no one. In Nasdaq's Amendment No. 2 to its Form 10 registration statement, Nasdaq states:
In the Commission's January 2001 order approving SuperMontage, it noted that in order to address concerns that Nasdaq's position as an ESIP [and exclusive securities information processor] would compel participation in SuperMontage, the NASD has committed to provide NASD members with the ability to opt-out of SuperMontage by providing an alternative quotation and transaction reporting facility for NASD members. In addition, the SEC has also indicated that the approval of Exchange Registration is linked to the NASD's obligation to provide an alternative facility to allow NASD members to report trades and disseminate quotations in exchange listed securities. As a result, it is likely that the NASD will be required to build a residual market for Nasdaq, NYSE, and Amex listed securities. If this market becomes a viable alternative to Nasdaq, then Nasdaq faces the risk of reduced market share in transactions and market information services revenues, which would adversely affect Nasdaq's business, financial condition, and operating results.13
Efforts to make NASD and Nasdaq appear independent of one another are largely window dressing. NASD and Nasdaq have interlocking boards. The NASD and Nasdaq board meetings are scheduled back-to-back in the same city to facilitate attendance at both by the interlocking directors. NASD retains a significant ownership interest in Nasdaq and a commercial interest in Nasdaq's eventual success as a for-profit exchange.
The fact that NASD and Nasdaq are not truly independent has important public policy implications. NASD is the regulator of the ECNs with which Nasdaq and SuperMontage compete and of trading in both the OTC market and, by contract with Nasdaq, trading and other conduct by Nasdaq members and on the Nasdaq market.
Nasdaq views with alarm anything that would compete with its primacy as a market. In its filings with the Commission, as quoted above, Nasdaq has identified the ADF as a potential competitor and a risk factor for investors considering whether to invest in Nasdaq. We believe the Commission should revisit and address now, before the launch of SuperMontage, NASD's relation to Nasdaq, the ADF and SuperMontage to ensure that NASD is as committed to the ADF as it is to SuperMontage.
The question of independence relates back to an expression by the Commission several years ago that NASD and the New York Stock Exchange should divorce the regulation of the market from the operation of the market. NASD and Nasdaq engineered a "separation" that was designed to accord with the announced views of the then Commission-notably, the New York Stock Exchange forthrightly refused to go along with those views-but the response of NASD and Nasdaq maximized the commercial advantages for both NASD and Nasdaq without achieving any commercially real separation.
The Commission was wise in requiring that a viable ADF be a legal pre-condition to approval of SuperMontage. Providing interpretive guidance regarding the Vendor Display Rule to ensure that the ADF will not be a hidden market, as it would have been without the Division of Market Regulation's guidance, was an essential first step in making the ADF a viable alternative to SuperMontage. We believe that, given the commitment of market participants and NASD, and given time, the ADF can become a viable alternative to SuperMontage. Currently, the major obstacles to the ADF, once participants have had enough time to develop necessary interfaces and connectivity, are the anticompetitive and discriminatory elements of SuperMontage. At each step in the development of the technology and fee structure of SuperMontage, Nasdaq has worked to discourage and penalize NASD members from participation in the ADF or any other venue outside of SuperMontage. The ADF cannot be found to meet the pre-condition set by the Commission for approval of SuperMontage so long as Nasdaq continues to structure SuperMontage to thwart the development of an ADF that will make participation in SuperMontage entirely voluntary.
Now that the NASD has finally issued the final specifications necessary for connecting to the ADF, we estimate that it would take three to four months to make ADF sufficiently functional to operate reasonably reliably, with adequate connectivity for us and for other participants to begin quoting. That assumes NASD and Nasdaq are committed to working to make the ADF a reality. We also believe that, for the ADF to offer meaningful competition to Nasdaq's SuperMontage, some revisions will be necessary in the interim: (i) the Commission should direct Nasdaq to develop a unified feed combining Nasdaq SuperMontage quotations and ADF quotations, with full identification of the quotation sources, during the period before data vendors can develop their own combined feeds, in compliance with the Division of Market Regulation's guidance under the Vendor Display Rule, discussed below; (ii) the Commission should direct Nasdaq to obey on the condition the Commission imposed in approving SuperMontage to provide a real-time data feed, and not the currently planned three-to-five second delay on "Total View" data so that the data are fully competitive with the SuperMontage data and equally usable by market participants; and (iii) the Commission should ensure that Nasdaq is not permitted to put into effect unfairly discriminatory pricing for access to and use of the SuperMontage, as described more fully above. Finally, we respectfully recommend that the Commission revisit and seek to resolve NASD's conflict of interest as owner of both the ADF and Nasdaq and regulator of both facilities. A credible and impartial regulator is essential to fair, orderly and truly competitive markets.
Very truly yours,
Kim Bang by RDB
Kim Bang, President
cc: The Hon. Harvey L. Pitt, Chairman
The Hon. Paul S. Atkins, Commissioner
The Hon. Roel C. Campos, Commissioner
The Hon. Cynthia Glassman, Commissioner
The Hon. Harvey J. Goldschmid, Commissioner
Annette L. Nazareth, Esq., Director,
Division of Market Regulation
Robert L. D. Colby, Esq., Deputy Director,
Division of Market Regulation
Alden S. Adkins, Esq., Associate Director,
Division of Market Regulation
Katherine A. England, Esq., Associate Director,
Division of Market Regulation
Elizabeth K. King, Esq., Associate Director,
Division of Market Regulation
John S. Polise, Esq., Senior Special Counsel
Division of Market Regulation
Mr. Stephen L. Williams, Economist
Division of Market Regulation
Dr. Lawrence E. Harris, Chief Economist
Giovanni P. Prezioso, Esq., General Counsel
Mr. Mark Radke, Chief of Staff
A number of variables affect the decision to participate in the ADF, including a non-competitive fee structure and the extent to which quotations displayed on the ADF would be made widely available to market participants. Of all factors to consider, however, the most basic is the set of technical specifications needed to connect to the ADF.
As the following time line shows, the final technical specifications for connecting to the ADF were not available until August 6, 2002. Bloomberg Tradebook announced its participation in the ADF on August 8, forty-eight hours after the final technical specifications were made available by NASD.
|January 19, 2001||Release No. 34-43863, order approving the SuperMontage proposal and conditioning approval upon NASD's commitment to provide NASD members with the ability to opt-out of the SuperMontage by providing an alternative quotation and transaction reporting facility for NASD members.|
|April 30, 2001
May 14, 2001
June 29, 2001
|Nasdaq files registration Form 10 and two amendments to Form 10 registering its securities. Nasdaq states that if the ADF becomes a viable alternative to Nasdaq, Nasdaq faces the risk of reduced market share in transactions and market information services revenues.|
|December 10, 2001||NASD Board approves the rules governing the proposed alternative quotation and trade reporting facility. The approved rules do not include technical specifications necessary for participation in the ADF.|
|December 14, 2001||Release No. 34-45156, proposed rule change filed with the Commission by NASD that would (i) revise the NASD rules in anticipation of approval of the registration of The Nasdaq Stock Market, Inc. and (ii) establish rules to govern OTC trading, including the implementation and operation of NASD's ADF. The proposed rule change does not include technical specifications necessary for participation in the ADF.|
|January 10, 2002||NASD announces that OM of Sweden has been chosen to build the ADF. The operating protocol used by OM is essential for connecting to the ADF. The OM operating system is not commonly used in the U.S. nor is there readily available conversion software.|
|March 4, 2002||Release No. 34-45501, a proposed rule change filed with the Commission by the NASD setting forth a schedule of fees for use of the NASD's proposed ADF. Those fees discouraged participation in the ADF and encouraged participation in SuperMontage. The release did not include technical specifications necessary for participation in the ADF.|
|March 11, 2002||NASD issues ADF Fact Sheet. The Fact Sheet contains no technical specifications necessary for participation in the ADF.|
|March 18, 2002||NASD issues its ADF Informational Overview. The Informational Overview contains no technical specifications necessary for participation in the ADF.|
|March 21, 2002||NASD issues its ADF Technical Overview. The Technical Overview contains no technical specifications necessary for participation in the ADF.|
|May 28, 2002||Release No. 34-45991, amendment no. 2 to the ADF proposal filed with the Commission by NASD. Part II of the release states: "The NASD has developed specifications for submitting order report data that will be provided shortly to market participants." The technical specifications referred to were not provided in final form until August 2002.|
|July 23, 2002||Letter of the Division of Market Regulation to NASD providing interpretive guidance regarding Rule 11Ac1-2, the Vendor Display Rule. For the first time, potential ADF participants are assured their liquidity on the ADF can actually be seen and its ECN source identified. This is a critical pre-condition for participation by ECNs in the ADF. No ECN would participate in an ADF that effectively hides the quotations it displays and the identities of quoting market participants.|
|July 24, 2002||Release No. 34-46249, approving NASD's ADF for Nasdaq stocks for a nine-month pilot period. The release contains no technical specifications necessary for participation in the ADF.|
|July 25, 2002||NASD announces the launch of the ADF will be July 29, 2002.|
|August 6, 2002||NASD issues Getting Started with ADF - Participant Interface Guide, providing technical specifications of the system. This is the first time the final technical specifications necessary for connecting to the ADF are made available.|
|August 8, 2002||Bloomberg Tradebook issues a press release announcing its participation in the ADF.|
Between February 2002 and the present, technical staff of Bloomberg Tradebook LLC has worked with technical staff of the NASD's ADF raising questions and identifying potential problems with the proposed system as it was being developed. The following is a time line of key communications in that cooperative process:
|February 26, 2002||Bloomberg Tradebook technical staff confers with ADF technical staff regarding Bloomberg Tradebook's first review of ADF technical specifications, a 400-page manual of OM specifications. ADF technical staff was unable to explain, based upon the OM specifications, how to build a connection to the ADF.|
|March 21, 2002||Bloomberg Tradebook technical staff encourages ADF technical staff's decision to consider a FIX "wrap" for the OM protocol. As of August 19, 2002, we still do not know whether the ADF technical staff has decided to provide a FIX "wrap".|
|May 29, 2002||ADF technical staff says that Island is programming to quote in the OM protocol. It is not clear how the Island connection will work until it is tested and certified. To date, neither testing nor certification has taken place.|
|July 5, 2002||ADF technical staff releases the first version of specifications for the ADF.|
|August 9, 2002||ADF technical staff actually provides the final version of specifications for the ADF and advises Bloomberg Tradebook that the first version of the technical specifications is no longer valid. ADF technical staff instructs Bloomberg Tradebook to work from the August 6, 2002 specifications in building its connection to the ADF.|
1 Bloomberg Tradebook operates a proprietary electronic communications network ("ECN") pursuant to Regulation ATS under the Securities Exchange Act of 1934 (the "Exchange Act") and a no-action letter from the staff of the Commission's Division of Market Regulation. Letter from Dr. Richard R. Lindsey to Roger D. Blanc (January 17, 1997), SEC No-Action Letter, 1997 SEC No-Act. LEXIS 55 (the "Bloomberg Tradebook No-Action Letter"). The Bloomberg Tradebook No-Action Letter was extended on several occasions. Bloomberg Tradebook is a registered broker-dealer and a member of NASD, Inc. Bloomberg Tradebook offers its institutional and broker-dealer customers, and other broker-dealers that access the Tradebook system via private connections and Nasdaq's SelectNet, the opportunity to buy and sell equity securities through use of the BLOOMBERG PROFESSIONAL service (as defined below).
Bloomberg Tradebook is a wholly owned subsidiary of Bloomberg L.P. ("Bloomberg"). Bloomberg is engaged in the business of providing its customers with financial market information, news and analytics via its worldwide electronic network (the "BLOOMBERG PROFESSIONALTM service"). Bloomberg also serves its broker-dealer and institutional customers' communications needs and facilitates their transaction of business by offering various additional services, including electronic messaging, non-anonymous offerings, bids wanted and equity order routing and indications of interest, and linkages to certain exchanges within and outside the United States. Approximately two million text messages and transaction messages involving billions of dollars of securities are sent and received by Bloomberg customers across the BLOOMBERG PROFESSIONAL service every business day. In addition, we expect in the future to provide access to additional points of liquidity as customer demand dictates.
2 Letter of July 23, 2002 from Robert L. D. Colby, Deputy Director, Division of Market Regulation, U.S. Securities and Exchange Commission, to Edward S. Knight, Esq., Executive Vice President and General Counsel, The Nasdaq Stock Market, Inc., re: Vendor Obligations to Display Quotation Information of the NASD Alternative Display Facility (the "July 23 Letter").
3 Rules 11Ac1-1 and 11Ac1-4 under the Securities Exchange Act of 1934.
4 See Securities Exchange Act Release No. 43863 (January 19, 2001) in text after n. 463.
5 See Securities Exchange Act Release No. 43863 (January 19, 2001) in text following n.463:
The Commission therefore is conditioning its approval of the SuperMontage on the following, which must be implemented prior to, or at the same time as, the SuperMontage:
. . . .
(3) that participation in SuperMontage will be entirely voluntary, because NASD quotes will be included in the Nasdaq quotation management system while Nasdaq is the exclusive SIP, but only for display purposes, and the NASD will provide access to its quotes on a market-neutral basis.
6 Securities Exchange Act Release No. 37619A (September 6, 1996).
7 ECNs have contributed significantly to those trends. For example, by permitting traders to disclose only part of their trading interest while holding the balance in undisclosed "reserve" and by permitting investors to have large orders divided automatically into randomly-sized small pieces before being presented to the market, ECNs have given investors the tools to control the market impact of their trading behavior and thus to avoid simply accepting the adverse-selection aspect of limit orders while reducing the impact of presenting market orders to the market. By reducing the market impact of transactions, these electronic techniques allow investors to reduce the extent to which the market "moves away" from them while they are buying or selling in significant quantities.
8 The SuperMontage rules distinguish between a Preferenced Order and what they call a "Non-Directed" order, but that distinction is not significant for purposes of this discussion.
9 See Securities Exchange Act Release No. 45906 (May 10, 2002).
10 See Securities Exchange Act Releases No. 45506 (March 15, 2002) and related preceding Nasdaq pricing proposals in Securities Exchange Act Releases No. 44899 (October 2, 2001), 44910 (October 5, 2001), 44918 (October 10, 2001).
11 Securities Exchange Act Release No. 46159 (July 2, 2002).
12 Securities Exchange Act Release No. 45506 (March 5, 2002), n. 4.
13 Amendment No. 2 to Form 10, File No. 000-32651, as filed with the Commission on June 29, 2001, item 1, Business, "Risk Factors".