March 3, 2006
Karen P. Mohr
Dear Ms. Mohr:
In your letter, dated February 23, 2006, you indicate your intent to implement certain new features to the Direct Edge ECN.1 Specifically, as further described in a concurrent amendment to Form ATS, Direct Edge LLC will offer subscribers (i) an option to route Nasdaq securities2 orders to other accessible market centers, and (ii) enter "market" type orders. You request that we reconfirm our no-action position with respect to Direct Edge ECN's status as an "electronic communications network" ("ECN") notwithstanding the changes to the operation of Direct Edge ECN.
The Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") has previously taken the position that the Direct Edge ECN is an ECN as defined in Rule 600(b)(23) of Regulation NMS3 under the Securities Exchange Act of 1934 ("Exchange Act"), and is in compliance with the requirements applicable to the ECN Display Alternative4 set forth in the ECN Amendment with respect to Nasdaq National Market and SmallCap Market securities for which a linkage between Direct Edge ECN and one or more national securities exchanges or national securities associations (collectively, "SROs") or the NASD Alternative Display Facility ("ADF") is operational, and Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division stated that it would not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker for entry into the Direct Edge ECN of: (i) orders without modifying their public quotations in compliance with the ECN Display Alternative and (ii) customer limit orders, in compliance with the Limit Order Display Rule. The Division set forth this position in a no-action letter issued on October 21, 2005 (the "October Letter").5
In the October Letter, the Division relied on various representations regarding the operation of the Direct Edge ECN, including that Direct Edge ECN would operate in substantially the same manner as ATTAIN ECN. You state that, in light of the new functionality available to Direct Edge ECN subscribers, this will not be the case. However, you represent that the new functionality does not impact the linkages between the Direct Edge ECN and the SROs and ADF or the manner in which the Direct Edge ECN book will be displayed. Your letter also reconfirms each of the other representations specified in the October Letter. On that basis, you request that the Division confirm its earlier no-action position.
The Division hereby grants your request. The Division continues to take the position that Direct Edge ECN is an "electronic communications network" as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that Direct Edge ECN continues to be in compliance with the requirements applicable to the ECN Display Alternative as described in Rule 602(b)(5)(ii) of Regulation NMS6 with respect to Nasdaq securities for which a linkage between Direct Edge ECN and an SRO or the ADF is operational and Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division will not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker for entry into the Direct Edge ECN of: (i) orders without modifying their public quotations in compliance with the ECN Display Alternative; and (ii) customer limit orders, in compliance with the Limit Order Display Rule. In taking this position, the Division relies on the following representations made in your letter dated February 2, 2006:
The Division conditions its position on the continuing accuracy of the representations listed above and compliance by Direct Edge LLC 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, Direct Edge ECN - may require a different response. The Division may request additional representations from you regarding the operation of Direct Edge ECN. 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 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 Display Alternative depends in many respects on the practical effect of the operational conditions established by Direct Edge ECN and the manner of operation of the linkage between Direct Edge ECN and the SRO or members of the ADF. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
The Division's October Letter is hereby withdrawn.
Robert L.D. Colby
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