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June 30, 2001

Knight Wants Archipelago Torpedoed

By Gregory Bresiger

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  • Knight Wants Archipelago Torpedoed

Knight Trading Group, already fighting against a group of regionals that want expanded Nasdaq coverage, wants the Securities and Exchange Commission to look more closely at the Pacific Exchange's electronic facility plan.

The Pacific Exchange is asking approval for a new electronic exchange of its Archipelago Exchange operation. Knight sees this as another threat to market makers as a class.

In a comment letter to the SEC, Knight, the biggest independent market maker in Nasdaq securities, says that would provide the Pacific Exchange with an "unfair" advantage.

The Arizona Stock Exchange has argued in favor of the Pacific application, contending that Archipelago would, "expedite the proposed [Archipelago Exchange] because it believes that it will help to resolve pressing market structure issues." Archipelago has a "innovative" single price auction opening system," according to Steven Wunsch, president of the Arizona Stock Exchange. He wrote a letter in support of one part of the Archipelago application.

Knight Trading Group also opposes the Pacific Exchange plan because it doesn't specify how fees would be charged against users.

Currently, the Unlisted Trading Privileges Plan calls for UTP exchanges to trade Nasdaq securities through Nasdaq's SelectNet system.

Knight also contends the rules change, if granted by the regulators, would hurt market makers as a class. That's because, "the combination of the proposed exchange's market structure and its plan to expand the number of Nasdaq securities traded pursuant to the Unlisted Trading Privileges Plan ("UTP") could unfairly disadvantage market makers," according to a February 9th comment letter sent by Michael Dorsey, Knight's general counsel. The letter was also sent to key members of Congress who oversee the securities industry.

Knight, which is joined in its opposition to the new electronic facility by Nasdaq, also contends that the Pacific Exchange, and its subsidiary, PCX Equities, could be proposing an anti-competitive practice with the Archipelago facility. Knight says the danger of such an operation would be if the order routing structure "requires firms to use ARCA's affiliated broker dealer, WAVE."

Pacific Exchange officials referred requests for comment to their SEC filing with the SEC. In it, Pacific said that Knight and other critics have misinterpreted the goals of Archipelago.

"Regulating ArcaEx as a facility of the PCX is consistent with the approach the Commission has followed in other cases similar to the PCX and the ArcaEx situation," PCX officials wrote in their filing.

"For example, the Commission approved the PCX's proposal to establish an exchange facility called the PCX Application of the OptiMark System, which was a trading system owned and operated by an entity other than an exchange. Likewise, the Philadelphia Stock Exchange [PHLX] itself has contracted with third parties to establish the VWAP Trading System as a facility of the PHLX."

"ArcaEx also has been designed to provide its users with a choice as to how they wish to route orders," Pacific officials wrote. WAVE will not have a competitive advantage over other broker dealers such as Knight, they said.