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January 1, 2002

ECNs, Market Makers Head for Arbitration: The Latest Dispute Over Access Fees

By Gregory Bresiger

Also in this article

  • ECNs, Market Makers Head for Arbitration: The Latest Dispute Over Access Fees
  • Page 2

Don't pay your light bill and your electricity is cut off.

But that's not the way it is working in the controversial battle over access fees charged to dealers by electronic communication networks.

One ECN, NexTrade, which operates out of Clearwater, Fla., may or may not cut off some two dozen dealers who are refusing to pay these fees.

Among those facing a complaint by NexTrade are Nasdaq market makers Hill Thomson Magid, Lehman Brothers and Crowell, Weedon & Company, firms that have all filed their own counter-complaints and are in the initial phase of preparing for an NASD arbitration hearing.

"We don't believe we should be charged for something that we didn't order; something that we believe is triggered merely because we used SuperSOES on Nasdaq," according to an attorney for one of the dealers that NexTrade is dunning.

The attorney, who would not be quoted by name, said attorneys for the market makers contend NexTrade's actions amount to a frivolous lawsuit. "In some cases we're talking about bills for hundreds or just a few thousand dollars," he added. "It will cost a hell of a lot more than that to hire attorneys for this," he complained.

The attorney for the market maker noted the irony of the case: NexTrade, obviously fearing the loss of the flow of business, had not cut off many of the market makers from its services even though they were delinquent in payment.

However, he concedes that, although the ECNs want his client to pay, at the same time the flow of business from dealers is critical to the survival of the ECNs.

For NexTrade, survival is a thorny issue. It is one of the three smallest ECNs in terms of its share of Nasdaq trade executions: a negligible 0.2 percent of total volume in recent months, according to Nasdaq statistics.

Several attorneys said they thought the NASD arbitration, which is not expected to be held until sometime this month at the earliest, could set precedents for the continuing controversy over ECN access fees, charges that marker makers believe are unfairly imposed.

"There's no contract or implied contract in using the [NexTrade] ECN," according to George Casey, a partner and co-manager of Nasdaq trading for Crowell, Weedon & Co. "We're confident that our position will be upheld." He noted that using an ECN is, at times, inevitable when a market maker goes through the SuperSOES system.

NexTrade officials declined comment. They said that attorneys in the matter should avoid public statement. They stressed that the arbitration rules bar them from commenting on the issue until it is adjudicated.

"We would be prejudicing the case if we commented," said Daniel Caamano, the attorney for NexTrade, an expanding business in some areas that was hiring new employees last summer.

NexTrade has filed an application to become a stock exchange and a futures exchange. Business, said NexTrade officials in its third quarter report, has been booming. In the quarter ending Sept. 30th, NexTrade reported record profits. The NexTrade ECN is offering 24-hour a day trading through participating broker dealers.