September 4, 2002
U.S. Securities and Exchange Commission
Re: SEC File Nos. SR-NASD-99-53 and 2002-97
Ladies and Gentlemen:
Bloomberg Tradebook LLC ("Bloomberg Tradebook") is responding to the requirement by the Securities and Exchange Commission that we certify, under oath, whether or not we intend to use the Alternative Display Facility (the "ADF") as our primary order collection and display facility for a significant portion of our business in Nasdaq securities on or before October 11, 2002; and, if yes, to provide a list of Nasdaq securities for which we are currently intending to post quotations for the ADF.
Bloomberg Tradebook is committed to the ADF. Bloomberg Tradebook believes a commercially viable ADF is critical to address the anti-competitive aspects of SuperMontage. More importantly, we believe a viable ADF will present our clients with new opportunities to lower their overall transaction costs. That's why we were the first market participant to commit publicly to the ADF, and it is why we remain committed to undertake the technical steps necessary to enable Bloomberg Tradebook to display quotations in the ADF. We again commend the SEC staff for issuing critical guidance on the Vendor Display Rule. That guidance was a necessary pre-condition for creating a display facility that will actually display, and hence permit ECN participation in the ADF.
Certification. The certification asks whether it is Bloomberg Tradebook's present intention to use the ADF as the primary order collection and display facility for a significant portion of our business beginning on or before October 11, 2002. We regret that we are unable to answer yes to this question. In our August 22 letter to the Commission we estimated that - having only received technical specifications necessary for coding on August 6 - connectivity, programming and testing necessary for us to display quotations would take three to four months. This estimate assumes full cooperation from NASD. We didn't pad the estimate. That represented, and still represents, our best judgment of the time this will take.
The reasons are simple. We operate a significant business with many clients who depend on our ability to represent their orders publicly. Our first priority - and that of any business - is to ensure the continuity of our operations. If we were to move our quotations to the ADF, many things outside our control would have to work. Will the new ADF software work? (NASD's testing agreement describes it as "pre-release software" and requires the user test firm to "...acknowledge that Service has not been fully tested or debugged.") Will our new quotation software work? Will the new ADF software work with our new software? Will trade reporting work properly? Will a sufficient percentage of vendors and others who distribute quotations be ready to make ADF quotations visible, so our clients' quotations may be seen? Will the new software of those vendors work properly? Will the order-generating software of other market participants be able to respond to quotations represented in the ADF?
We are confident all of these issues will be resolved over time. With investigation and thorough testing of each issue and the cooperation of other parties, we believe it could be done in 90 to 120 days. Moving to the ADF without such a process would be irresponsible as a business matter, for it would place in jeopardy the continuity of the service we now provide our clients.
This very issue raised itself as a business matter in June, and drove a key decision we made at that time. There were fewer than 90-120 days left before Nasdaq's proposed SuperMontage launch date. This would not have been enough time for us to move to the ADF, even if the other conditions necessary to make that move possible had existed - that is, availability of final technical specifications, vendor display guidance, etc. We determined that time had run out for the ADF. We would not bet our business on the hope that the SEC would delay the SuperMontage launch, however compelling we thought the argument for delay.
We had to act at that time because the SuperMontage software is not "backwards compatible" for ECNs as it is for market-makers. We would have to make substantial programming changes to be able to represent our clients' orders in SuperMontage. As we saw it, if the ADF were not ready for us and we were not ready for SuperMontage, we could be out of business. Thus we made a full commitment to be able to quote in the SuperMontage by the proposed launch date and after substantial work and substantial testing with Nasdaq we made the deadline. We have been ready and waiting for SuperMontage since late July.
Since that time we have been ready to work on the ADF, but only with assurances that we would have sufficient time to get the job done properly. Without such assurances we believe the best thing for our clients is to publish our quotations in the SuperMontage, however unfair that may be, working to move quotations to the ADF at the earliest opportunity. Under the circumstances we'd rather get going with the SuperMontage launch and get it behind us.
We wholeheartedly endorse the policy goals articulated by Market Regulation staff at last week's open meeting. We are excited about the future of the U.S. equity markets, a future where all quoting market participants in all equity securities will have a viable alternative method for displaying their quotations. But we can't imagine how the ADF could have been approved as commercially viable without consideration of commercial factors faced by actual businesses such as those we outlined above. We believe the decision to approve the ADF without consideration of these factors was unwise. We feel that the SEC's promise to make SuperMontage's debut contingent on the creation of an alternative display facility has not been honored. Investors will suffer as a result.
We hope the Commission recognizes that Nasdaq wields government-sponsored monopoly power over its customers until such time as a viable alternative does exist.
Abuse of the regulatory process. There was some suggestion at the open meeting that ECNs would prove their good faith only by affirming under oath their intention to participate in the ADF in 47 days. The certification process would smoke out any ECN effort to abuse the regulatory process with delaying tactics. We rather regard the unprecedented request that we answer questions about our commercial plans under oath as evidence this view was given some credence.
The facts don't support the suggestion that ECNs have abused the regulatory process. Bloomberg Tradebook is not only ready for SuperMontage today, but has been ready since July. By contrast, it now appears that a software vendor servicing many Nasdaq market makers was not ready and will not be ready until September 17 at the earliest. While Nasdaq and some market participants have spent enormous time and resources - at the Commission, on Capitol Hill, in public meetings and in the press - criticizing ECNs for delay, Nasdaq's market makers aren't ready to implement SuperMontage.
One wonders whether Nasdaq shared information about their unreadiness with the Commission before the open meeting at which the launch of SuperMontage was approved. We don't recall that it was discussed during the meeting. Nasdaq informed us and other members for the first time on a weekly conference call with members only hours after the Commission rendered its decision.
While we haven't abused the regulatory process, surely somebody has. The Commission expressly conditioned its January 2001 approval of SuperMontage upon the creation of a viable ADF. NASD took until August 6, 2002 - 18 months - to provide market participants with final technical specifications necessary for us to connect to the ADF. It would have been fair to make Nasdaq pay for this delay with a further delay of SuperMontage. In our view Nasdaq would have used their considerable influence early on with NASD to persuade NASD to move more quickly on ADF had Nasdaq not believed the ADF condition could easily be vitiated.
Our hope is that Nasdaq does not end up delaying SuperMontage's launch in small bites that add up to 90 to 120 days; it isn't just the amount of time but the assurance that there would be sufficient time that we require to plan a move to the ADF.
Market structure meetings. We applaud the Commission's decision to hold public meetings on critical market structure issues. There are significant issues relative to SuperMontage that require ongoing Commission oversight - including among others, issues relating to pricing and conflicts of interest. There are numerous market structure issues that must be carefully considered before Nasdaq's exchange application is permitted to go forward. Bloomberg Tradebook hopes it will be provided an opportunity to participate in these critical market structure meetings. It's imperative that principles be articulated that will promote competition for the benefit of markets and investors.
Very truly yours,
Kevin M. Foley
cc: The Hon. Harvey L. Pitt, Chairman
The Hon. Phil Gramm, Ranking Minority Member, Committee on Banking, Housing, and Urban Affairs, United States Senate
The Hon. Paul S. Sarbanes, Chairman, Committee on Banking, Housing, and Urban Affairs, United States Senate
The Hon. John LaFalce, Ranking Minority Member, Financial Services Committee,
The Hon. Michael G. Oxley, Chairman, Financial Services Committee, U.S. House of Representatives