Division of Market Regulation:
February 6, 2002
James C. Yong
Wildman, Harrold, Allen & Dixon
225 West Wacker Drive
Chicago, Illinois 60606-1229
Re: Track System
Dear Mr. Yong:
In your letter, dated January 7, 2002, you request that the Division of Market Regulation confirm that the Track ECN ("Track System" or "System") operated by Track Data Securities Corp. ("Track") is an "electronic communications network" ("ECN") as defined in the amendments to the Quote Rule1 ("ECN Amendment") and the Limit Order Display Rule2 (cumulatively, "Order Execution Rules"). You also request that the Division confirm that Track System will be in compliance with the requirements under the ECN Display Alternative3 set forth in the ECN Amendment with respect to Nasdaq securities for which a linkage between Track System and the Nasdaq system is operational. In addition, you request that the Division not recommend that the Commission take enforcement action under the ECN Amendment or the Limit Order Display Rule against OTC market makers or exchange specialists who are participants in the System, if those participants enter orders into the System without modifying their public quotations in compliance with the Order Execution Rules.
The ECN Amendment defines the term ECN as "any electronic system that widely disseminates to third parties orders entered therein by an exchange market maker or OTC market maker, and permits such orders to be executed against in whole or in part."4 In your letter, you state that the System satisfies all elements of the definition of ECN contained in the ECN Amendment. Specifically, you state that participants may enter orders into the System electronically through a dedicated line. The System will disseminate those orders to all other participants, any of which may effect executions against the displayed orders. You represent that participants include at least one registered Nasdaq market maker. Finally, you represent that orders displayed in the System are available to be executed in whole or in part by all participants.
The ECN Amendment provides, among other things, that a priced order entered by an exchange specialist or OTC market maker into an ECN that widely disseminates such orders is a bid or offer under the Quote Rule to be communicated by the specialist or market maker to its exchange or association.5 The ECN Display Alternative, however, provides that an exchange specialist or OTC market maker has complied with the ECN Amendment if the ECN: (1) provides to a self-regulatory organization for inclusion into the public quotation system the prices and sizes of such order at the highest buy price and lowest sell price for the security; and (2) provides to any broker or dealer the ability to effect transactions with such orders that is equivalent to the ability of any broker or dealer to effect a transaction with an exchange specialist or OTC market maker pursuant to the rules of the self-regulatory organization receiving the prices from the ECN for inclusion in the public quotation system. Furthermore, the Limit Order Display Rule requires OTC market makers and exchange specialists to include in their quotes the customer limit orders they receive, subject to certain exceptions. One such exception applies when the OTC market maker or exchange specialist delivers the customer limit order to an ECN that complies with the requirements of the ECN Display Alternative.
In your letter, you request that the Division advise that Track's method of operation with respect to Nasdaq securities for which a linkage between Track System and Nasdaq is operational ("SelectNet linkage") is in compliance with the ECN Display Alternative for Nasdaq securities. You represent that Track System complies with the ECN Display Alternative. In this regard, you have informed us that, pursuant to negotiations with Nasdaq, on or about February 1, 2002, Track System will provide to Nasdaq over an operative electronic linkage the requisite data concerning best prices and sizes that exchange specialists, OTC market makers and non-market maker participants (who so request) have entered in securities quoted on Nasdaq. You also represent that Track System will allow broker-dealers the ability to effect transactions with orders in Track System via the SelectNet linkage or through a telephone desk staffed by employees who meet applicable NASD qualification standards. You represent that Track System will provide access to broker-dealers via either SelectNet or the telephone for a charge of no more than the then-current highest rate charged to a substantial proportion of the active broker-dealer participants in the System, and in any event, no more than $0.015 per share. Finally, you state that Track System will provide response times for orders entered into Track System through SelectNet access no slower than the response time Track System will offer to subscribers who enter orders directly into the System, and in any event not more than a few seconds.
In addition, in your letter, as well as in conversations with the staff of the Division, you have represented that Track will put in place and maintain security procedures to ensure that only certain designated personnel have access to Track System. You have also represented that those personnel will keep all trading information entered into Track System confidential, and will not utilize it for trading in Track System's proprietary account, its customers' accounts or their own personal trading accounts.
On the basis of the representations contained in your letters, the Division confirms that Track System is an "electronic communications network" as defined in the Order Execution Rules. The Division also preliminarily believes that Track System will be in compliance with the requirements under the ECN Display Alternative set forth in the ECN Amendment with respect to Nasdaq securities for which a linkage between Track System and the Nasdaq system is operational.6 Accordingly, the Division will not recommend that the Commission take enforcement action under the ECN Amendment or the Limit Order Display Rule against OTC market makers or exchange specialists who are participants in Track System, if those participants enter orders into Track System without modifying their public quotations in compliance with the Order Execution Rules. The Division conditions its position on compliance by the System with the non-discrimination provisions of the Addendum to the Nasdaq Workstation II Subscriber Agreement (i.e., Section 2, Response Time). The Division notes that compliance with the ECN Amendment depends in many respects on the practical effect of the operational conditions established by Track System and the manner of the operation of the linkage between Track System and Nasdaq. Therefore, the Division is limiting its assurances regarding compliance with the ECN Amendment and the ECN Display Alternative and the Division's no-action relief to the period ending March 31, 2002.
The Division further conditions its position upon your representation in your letter that Track System 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, in the process of its continuing review of ECNs, request records from Track System regarding such reviews and tests. In addition, the Division may request additional representations from Track regarding the operation of Track System.
The Division further conditions its position upon your representation that the trading information entered into Track System will be kept confidential by those employees of Track having access to it, and that the operation of the System will be kept separate from the other business of Track. The Division, in the process of its continuing review of ECNs, may request records concerning procedures addressing these issues. Further, the Division will consider extending or modifying its temporary no-action position prior to March 31,2002, based on its continuing experience with 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 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 also 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
|1|| Rule 11Ac1-1 under the Securities Exchange Act of 1934, 17 CFR 240.11Ac1-1. See Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290.
|2|| Rule 11Ac1-4 under the Securities Exchange Act of 1934, 17 CFR 240.11Ac1-4. See Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290. The definition of ECN contained in the Limit Order Display Rule incorporates by reference the definition of ECN in the ECN Amendment.
|3|| See discussion, infra.
|4|| Rule 11Ac1-1(a)(8), 17 CFR 240.11Ac1-1(a)(8).
|5|| Rule 11Ac1-1(c)(5)(i), 17 CFR 240.11Ac1-1(c)(5)(i).
|6|| This determination specifically does not apply to securities for, or during hours in, which a linkage between Track and the Nasdaq system is not operational. |