January 11, 2006
Mr. C. Thomas Richardson
Dear Mr. Richardson:
In your letter dated January 10, 2006, you state that Citigroup Financial Products Inc. ("CFPI") intends to acquire (i) the stock of OnTrade, Inc. ("OnTrade"), the broker-dealer that is currently registered with the Securities and Exchange Commission ("Commission") and has previously operated through the date hereof the electronic communications network ("ECN")1 known as NexTrade ECN ("NexTrade ECN"), and (ii) certain assets of NexTrade Holdings, Inc., the parent company of OnTrade (collectively, the "Proposed Acquisition").
The Division has previously taken the position that NexTrade ECN is an ECN as defined in the "ECN Amendment" to the Quote Rule2 and the Limit Order Display Rule3 (collectively the "Order Execution Rules") under the Act and that OnTrade would be in compliance with the requirements applicable to the ECN Display Alternative4 set forth in the ECN Amendment with respect to any Nasdaq security for which a linkage between NexTrade ECN and a self-regulatory organization ("SRO") is operational. The Division has stated that it would not recommend that the Commission take enforcement action against OTC market makers or exchange market makers, each as defined in Regulation NMS,5 who are participants in NexTrade ECN if those market makers enter orders into NexTrade ECN without modifying their public quotations, in compliance with the ECN Display Alternative. The Division set forth this position in a series of no-action letters; the original no-action letter, issued on April 2, 2004, was extended most recently on October 7, 2005.
You represent that, upon consummation of the Proposed Acquisition, CFPI will re-brand the NexTrade ECN as OnTrade ECN ("OnTrade ECN"), and OnTrade will entirely own and operate OnTrade ECN as an alternative trading system pursuant to Regulation ATS of the Act.6 In addition, you represent that OnTrade will operate OnTrade ECN in substantially the same manner as OnTrade had operated NexTrade ECN, i.e., as an ECN in NMS stocks,7 pursuant to the rules of one or more national securities exchanges or national securities associations.
In your letter, you request that the Division advise OnTrade that:
The Division hereby grants your request. Accordingly, the Division takes the position that, upon consummation of the Proposed Acquisition, OnTrade ECN will be an ECN as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that OnTrade will be in compliance with the requirements applicable to the ECN Display Alternative with respect to NMS stocks for which a linkage between OnTrade ECN and an SRO or the ADF is operational and OnTrade 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 under the ECN Amendment or the Limit Order Display Rule against any OTC market maker or exchange market maker for entry into OnTrade 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 relied on the following representations made in your letter of January 10, 2006:
The Division 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 ECN, may require a different response. The Division may request additional representations from you regarding the operation of OnTrade 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 Act11 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 OnTrade ECN and the manner of operation of the linkage between OnTrade 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.
Upon consummation of the Proposed Acquisition, the Division's no-action position with respect to NexTrade ECN is withdrawn.
Robert L.D. Colby
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