Brut, LLC

Securities Exchange Act of 1934
Release No. 48718 / October 30, 2003

Administrative Proceeding
File No. 3-11320

I.

The Securities and Exchange Commission ("Commission" or "SEC") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Brut, LLC ("Brut" or "Respondent").

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.

III.

On the basis of this Order and Respondent's Offer, the Commission finds that:

Respondent

1. Brut, LLC, a wholly-owned subsidiary of SunGard Data Systems, Inc., is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act, a registered alternative trading system, and a member of the NASD. Brut is headquartered in New York City. It operates The Brut ECN System, an electronic communications network ("ECN").

Background

2. In 1998, Brut created the Brut ECN System, which permits market makers that subscribe to Brut's services to display priced orders for Nasdaq and listed equity securities on Brut's ECN on an anonymous basis. Subscribers generally enter buy and sell orders through their computers. The ECN displays the symbol, price, time of entry and size of each order to all system subscribers. In addition, the ECN sends its best bid and offer on each security (sometimes in rounded form, as discussed below) to the public quotation system for display. The public quotation system is the structure through which the stock exchanges and NASD disseminate quotes through vendors to the public.

3. During the relevant time period, non-subscribers could execute orders against Brut's publicly displayed bids and offers through SelectNet, a Nasdaq-owned order-routing vehicle (SelectNet is no longer in use. The Nasdaq order-routing service is provided by a new system called "SuperMontage").

4. Some of Brut's subscribers are market makers. Under the Limit Order Display Rule (Exchange Act Rule 11Ac1-4(b)), market makers must display on the public quotation system the price of any customer limit order that is priced better than the market maker's own public quote. The market maker can satisfy this requirement, however, by delivering the limit order to an ECN for display, so long as the ECN complies with the ECN Display Alternative Rule (Exchange Act Rule 11Ac1-1(c)(5)(ii)).

5. When a subscribing market maker attempts to use Brut to fulfill its display obligations by entering a customer limit order into Brut's ECN system, and that order is better than Brut's current quote for that security, Brut is required to disseminate the market maker's quote to the public quotation system on behalf of the market maker. If the market maker's quote is at a non-standard price increment (one not approved by the primary market for the security) and the market maker uses Brut to fulfill its display responsibilities, Brut is permitted under the Commission's order handling rules to round the disseminated quote to the nearest quote increment allowed by the disseminating market. Buy orders are rounded down and sell orders rounded up. For example, during the relevant time period, which occurred prior to the implementation of decimalization, a Nasdaq stock could be quoted at increments of $ 1/16, such as $12 15/16. A priced order using smaller increments, such as $12 61/64, would be rounded down to $12 15/16 if a buy, and up to $13 if a sell.

6. When Brut rounded an order for display purposes, it was still required to execute the quoted order at the actual, non-rounded price. To return to the example of an order placed by a market maker at $12 61/64, which Brut rounded for display on the public quotation system to $12 15/16 when a buy, and $13 when a sell, Brut was required to execute the buy or the sell at the non-rounded price, $12 61/64, or it failed to comply with the conditions contained in the ECN Display Alternative Rule; in turn, the market maker violated the Limit Order Display Rule.

7. Brut's ECN system was originally programmed to execute rounded orders at the appropriate, non-rounded prices when the execution involved a transaction between two Brut subscribers. But when non-subscribers executed against rounded Brut orders through SelectNet, Brut's ECN system was originally programmed to execute the orders at rounded prices rather than the actual, non-rounded prices. To return to the example, Brut programmed its system to execute a market maker's $12 61/64 buy order at $12 61/64 if the seller was a Brut subscriber but at $12 15/16 if the seller was a non-subscriber, and a market maker's $12 61/64 sell order at $12 61/64 if the buyer was a Brut subscriber but at $13 if the buyer was a non-subscriber.

8. Rule 301(b) under Regulation ATS required Brut to file an initial operation report on Form ATS before beginning to operate as an alternative trading system. Brut filed its initial Form ATS on May 11, 1999. In this report, which required, among other things, that Brut describe its manner of operation, Brut stated, "top of the book orders [that is, the best bids and offers Brut has] can be accessed by non-subscribers," but failed to say that non-subscriber orders would be executed at inferior prices.

9. On February 12, 2001, in connection with an SEC examination, SEC staff discovered that Brut was incorrectly executing rounded SelectNet orders. Upon learning of this programming issue, Brut immediately reprogrammed its system to execute all rounded orders at their actual, non-rounded prices. Re-programming work was completed on March 5, 2001.

10. As a result of the way Brut's ECN system was misprogrammed, from May 1998 until March 5, 2001, Brut executed certain SelectNet orders at rounded prices.

Legal Analysis

11. Section 21C of the Exchange Act authorizes the Commission to enter a cease-and-desist order against any person (including a broker or dealer) who "causes" a violation of any provision of the Exchange Act or rule thereunder.

12. The order handling rules are designed to enhance the quality of published quotations for securities and promote competition and pricing efficiency in U.S. securities markets. Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996). When Brut executed rounded orders at rounded prices, as described above, Brut caused its market maker subscribers to violate one of the order handling rules, the Limit Order Display Rule, Exchange Act Rule 11Ac1-4.

13. Section 11A(c)(1) of the Exchange Act prohibits a member of a self-regulatory organization, broker, or dealer from using the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security in violation of any Commission rules or regulations as the Commission shall prescribe as necessary or appropriate to, among other things, assure the prompt, accurate, reliable, and fair processing and publication of information with respect to quotations and transactions in such securities. By causing its subscriber market makers to violate the Limit Order Display Rule, Brut also caused the market makers to violate Section 11A(c)(1) of the Exchange Act.

14. Section 15(b)(4)(A) of the Exchange Act authorizes the Commission to impose sanctions in an administrative proceeding on any broker or dealer if it finds, on the record after notice and opportunity for hearing, that such broker or dealer has, in any report required to be filed with the Commission, willfully made any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact. Section 21B(a)(3) of the Exchange Act authorizes the Commission to impose civil penalties in such a proceeding.

15. Rule 301(b) under Regulation ATS requires alternative trading systems, such as Brut, to file an initial operation report on Form ATS at least twenty days prior to commencing operation as an alternative trading system. 17 CFR § 242.301(b)(2). Form ATS is a report required to be filed with the Commission within the meaning of Section 15(b)(4)(A). 17 CFR § 242.301(b)(2)(vi). The form requires alternative trading systems to provide information about their system, including a detailed description of how it will operate. One purpose of the filing is to alert the Commission before the system begins to operate to potential problems that might affect investors. See Regulation of Exchanges and Alternative Trading Systems, Release No. 34-40760 (Dec. 8, 1998). In light of that purpose, and in light of the circumstances under which a Form ATS is filed, the failure to disclose that a system will operate to cause violations of the securities laws that impact the price at which certain investors' orders are executed, renders the filing misleading as to a material fact.

16. In filing its Form ATS, Brut willfully failed to disclose that its system would cause violations of the federal securities laws that would impact investors. Specifically, in contravention of the Limit Order Display Rule, the system would execute non-subscribers' orders against rounded quotes at rounded (not actual) prices, failing to pass on the better, actual prices to non-subscribers. Thus Brut willfully filed a Form ATS that was misleading as to a material fact. Sections 15(b)(4)(A) and 21B(a)(3) of the Exchange Act authorize the Commission to impose sanctions, including civil penalties, for Brut's filing of the materially misleading Form ATS.¹

Brut's Remedial Efforts

17. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Brut and cooperation afforded the Commission staff.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Brut's Offer.

Accordingly, it is hereby ORDERED:

A. That Respondent Brut cease and desist from committing or causing any violations and any future violations of Section 11A(c)(1) of the Exchange Act and Rule 11Ac1-4 thereunder, and

B. That Respondent Brut shall, within thirty (30) days of the entry of this Order, pay a civil money penalty in the amount of $45,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Brut, LLC as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Lawrence A. West, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0801.

By the Commission.

Jonathan G. Katz
Secretary