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April 1, 2002

STA Urges Reform of Access Fees: SEC Asked to Change the Competitive Advantage' for ECNs

By Gregory Bresiger

Electronic communications networks continue to have a competitive advantage over market makers because of their ability to charge access fees. And that advantage was provided by the regulators and should be changed by them.

This claim - frequently heard in the dealer community - gained a new lease of life in a letter asking for various regulatory changes that was dispatched by the Security Traders Association to SEC Chairman Harvey Pitt.

"Although ECNs may charge access fees, the Commission has steadfastly refused to allow market makers to charge similar fees," according to the letter sent by John Giesea, president of the STA. Giesea writes that, if the SEC doesn't accept the STA's request, "in light of the conversion to decimals, we believe the goals of the national market system would be better served by prohibiting an ECN access fee when an ECN is alone at the inside market."

More Expenses

Giesea also argues that this could reduce, "the maximum fee that can be imposed and/or reflecting such charges in the displayed quotations of ECNs." Access fees are adding an extra layer of expense that puts various maker players such as broker dealers and market makers at a competitive disadvantage, Giesea contends.

But the prevalence of access fees could also cause these same firms some regulatory problems. "The imposition of ECN fees has also raised best execution concerns because a broker dealer which has not paid ECN access fees may not have access to the inside market when published by an ECN," Giesea writes.

Faced with this dilemma," Giesea said, "a broker dealer must determine to fill the order proprietarily from its own account or not fill the customer order. As a result, the imposition of these fees has put the broker dealer's customer at a competitive disadvantage because it is denied access to the inside market."

Among the STA's proposed solutions: Eliminate ECN access fees, reduce the maximum allowable fees to $0.001 per share, or prohibit the fees when the ECN is at the inside market. An SEC spokesman declined comment. He said that the commission doesn't comment on letters sent to it. Giesea, in an interview with Traders Magazine, said the sentiment of his membership generally backs the reform of access fees.

"These things remain an irritant. There's a pretty good argument that can be made that the elimination of these fees would be best for all parties," according to Giesea. "The profitability of many of our members is being squeezed as these charges continue to be imposed. These fees represent a significant cost for market making entities," he added. Giesea also added that the access fees debate could move to a new place - the NASD's projected Alternative Display Facility (ADF), which some ECNs have said they will use in preference to Nasdaq's planned SuperMontage.

Conflicting Opinions

"It isn't clear who can and can't charge access fees for the ADF. There is conflicting opinions on that," Giesea said. He also said that the SEC has yet to provide a response to his letter, which was sent in early March.

Industry sources say several ECN officials were disturbed by the letter. For example, Giesea conceded that the STA, which has ECN representation, was not unanimous in its support for the call to end access fees. Instinet was rumored to be filing its own letter with the SEC or making its own announcement about access fees as Traders Magazine went to press. But an Instinet spokeswoman would only say that the firm is studying the issue and has no immediate comment.