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January 1, 2002

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

By Gregory Bresiger

The Security Traders Association, with both market making and ECNs as members, has taken a middle-of-the-road position on this touchy issue, which is being watched closely by much of the industry.

"ECN customers must pay an access fee for the use of a network when they buy or sell securities," the STA said in a prepared statement. "Market makers, on the other hand, have not been permitted to charge fees to ECNs or to other market makers to effect a transaction. This situation creates an inequity that must be addressed."

The organization also said it is against any requirement that forces a market maker to incur a fee in order to satisfy best execution requirements. John Giesea, the new STA president, called on the regulators to clear up the basic "inequity" of access fees. Giesea said that market makers can be charged, but they can't charge their customers. STA officials called on the SEC to clarify when access fees can be imposed. Clarifications are needed, several market participants privately said, because arbitration panels have not been clear.

For example, in late 2000, an NASD resolution panel decided a case in favor of an alternative trading system. It awarded Bloomberg Tradebook some $90,000 plus interest that it had been trying to recover from U.S. Bancorp Piper Jaffray. U.S. Bancorp Piper Jaffray held that Bloomberg's trading practices violated securities regulations.

Cut Off

But Bloomberg noted that the brokerage was paying 1.5 cents per share for several months on transactions in 1997, then ignored the bills, but continued to use the service until it was cut off.

That time the panel sided with Bloomberg. However, late in 1999, another NASD arbitration group largely sided with Knight Securities. Although it required Knight to pay All-Tech, an ECN, some $3,800 with interest for an overdue bill, All-Tech had been asking for close to $600,000.

Although All-Tech was claiming victory, its chief counsel was quoted as saying, "We are somewhat curious how arbitrators arrived at the dollar amount of the award." The access fee is a hot potato that Harvey Pitt, the new SEC chairman, inherited. He inherited the controversy from his predecessor, Arthur Levitt, who criticized access fees and asked his staff to restore "a fair competitive balance between dealers and ECNs." An attorney for one of the market makers said their counter complaint contains many of Levitt's comments. "We're required to obtain best execution, yet we end up using ECNs even though we don't want to," said the attorney for one of the market makers, declining to be quoted by name. An SEC spokesman didn't respond to requests for comment.