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September 30, 2001

ECN Access Policy Bushwacked in Texas

By Peter Chapman

ECN access fees came under fire at the Security Traders Association's Fifth Annual Technology Conference.

Nasdaq market makers demanded that ECN executives explain why the increasingly onerous charges shouldn't be abolished.

The issue, which was raised in a packed conference room at the Four Seasons Hotel in Irving, Texas, has been contentious since the Securities and Exchange Commission first permitted ECNs to charge dealers for hitting their bids or lifting their offers in 1997 when it approved the Order Handling Rules. Now that decimalization has driven spreads to a penny for some of the most actively traded stocks, the per-share charge is taking a bigger bite out of dealer profits.

Representatives of four of the top six ECNs - BRUT, Archipelago, Tradebook and Island - probably felt they had been ambushed as trader after trader questioned and admonished them. All the execs said their business models necessitated the fees. "Screw your business model!" blasted back one enraged dealer at last month's conference. Dennis Green, head trader at Baltimore's Legg Mason, asked why ECNs had to make money.

Sanjiv Gupta, head of research at Bloomberg Tradebook, said his organization was in favor of abolishment, but would not unilaterally "disarm." Rodney Faragalla, vice president of operations at Island, queried why other ECNs did not match Island's prices which, at a quarter-cent, are the lowest among the ECNs. A few execs remarked that fees at Instinet - not in attendance - were actually the highest. Instinet was not available later for comment.

Stewart Townsend, creator and chief information officer of Archipelago, summed up the chief rationale: "Why would you bother to be a customer of Archipelago if you could get there for free through Nasdaq?