April 2, 2004
Mr. Paul Merolla
Re: Inet ECN
Dear Mr. Merolla:
This letter extends the temporary no-action position originally taken by the Division of Market Regulation ("Division") on January 17, 1997 until January 6, 2005 with regard to Island ECN. This letter also extends the no-action position taken by the Division on November 7, 2002, relating to any Nasdaq and exchange-listed securities for which a linkage between Island and a self-regulatory organization ("SRO") is operational. The Commission notes that Island ECN changed its name to Inet ECN effective November 17, 2003.1 The January 17th and November 7th letters confirmed that Island, now known as Inet, is an ECN as that term is defined in the amendments to the Quote Rule ("ECN Amendment") and Limit Order Display Rule (cumulatively, "Order Execution Rules"). Those letters also confirmed that Island, now known as Inet, would be in compliance with the requirements of Rule 11Ac1-1(c)(5)(ii) of the Exchange Act ("ECN Display Alternative") with respect to any Nasdaq and exchange-listed securities for which a linkage between Island and the self-regulatory organization ("SRO") is operational. In the January 17th and November 7th letters, the Division took the position that it would not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker as defined in the Order Execution Rules, for entry of orders into Island without modifying their public quotations in compliance with the ECN Amendment.
The Division continues to condition its position on compliance with the terms expressed in the January 17th and November 7th letters. These terms include, but are not limited to, compliance with the requirement that Inet ECN respond to orders entered into Inet ECN through access to the SRO no slower than Inet ECN responds to orders entered directly into the System, and in any event in no more than a few seconds.
The Division further conditions its position upon your representation that Inet ECN has sufficient capacity to handle the volume of trading reasonably anticipated in its System. Such capacity should be ensured through periodic review and testing to (1) ensure future capacity, (2) identify potential weaknesses, and (3) reduce the risks of system failures and threats to system integrity. The Division may request records from Inet ECN regarding such reviews and tests.
The Division further conditions its position on Inet ECN providing brokers access via either an SRO or the telephone for a charge of no more than the fee Inet ECN charges a substantial proportion of its active broker-dealer subscribers, and in any event, no more than $0.009 per share, plus any fee charged to Inet ECN by an SRO for trades and plus any applicable transaction fee payable pursuant to Section 31 of the Securities Exchange Act of 1934 ("Exchange Act"). In addition, the Division may request additional representations from you regarding the operation of Inet ECN. Further, the Division will consider extending, modifying, or revoking its temporary no-action position prior to January 6, 2005, based on its continuing experience with Inet's compliance with the terms of this no-action letter and the operation of the ECN Display Alternative.
This no-action position regards enforcement action under Section 11A of the Exchange Act only, and does not express any legal conclusions regarding the applicability of Section 11A of the Exchange Act or other statutory or regulatory provisions of the federal securities laws. This no-action position is 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
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