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June 30, 2002

NASD's ADF Blasted As Weak: Nasdaq SuperMontage Alternative Is Under Fire

By Gregory Bresiger

The National Association of Securities Dealers, says one of its critics, has yet to show that its proposed Alternative Display Facility (ADF) will provide a reasonable alternative to Nasdaq's SuperMontage trading platform. That's because participants will not be offered a true price alternative, he said.

"The ADF as currently proposed," charges Kevin Foley, chief executive at Bloomberg Tradebook in an SEC comment letter, "would not publish the bids and offers of ECNs and other ADF participants in the national market montage because the Commission's Limit Order Display Rule (Exchange Act Rule 11 Ac1-4) does not require display of more than the best bid and offer."

Bloomberg and others have warned that the SuperMontage proposal is rigged against ECNs. A weak point of the proposal is the idea that the ADF will provide an effective execution venue, these critics charge, arguing it will not.

In his letter, Foley also warned that, "if the best bid and offer is on the SuperMontage screen, the quotations on ADF will not be displayed in the marketplace. In that case, the ADF will never be an effective alternative to SuperMontage."

NASD officials, who said that they hadn't had a chance to review the letter, would have no comment. "We generally don't comment on comment letters," said a spokesman for the NASD.

The ADF also came under fire at a recent seminar for industry pros on trading and market structure, at Baruch College in New York City. One speaker, James Ross, a senior vice president at Instinet, described the ADF as an "1970s-style quotation system."

"It is not an alternative but an attempt to handcuff the [Nasdaq] competition," he said. "It's like the referee playing the game when the person writing the rules is launching the system."

An Illusion?

Sanjiv Gupta, director of trading, research and strategy at Bloomberg, told Traders Magazine that the ADF is "designed to provide the illusion of competition when there will be no competition." In his letter, Foley argues that, "in absence of proof that the ADF will be meaningful, the Nasdaq SuperMontage fee proposal is truly monopoly pricing. Nasdaq has not justified the proposed fees and they are an inappropriate burden on competition." Despite the criticism of some, NASD Chairman and CEO Robert Glauber, in comments as Traders Magazine went to press, noted that the ADF would be fully operational this summer. "ADF remains on track for its mid-year launch. We're ready and looking forward to it. We don't expect the launch to be a big bang all at once. Rather, given all the uncertainties of the moment, we expect rolling admissions, as it were, with participants coming on board when they are ready throughout the summer," Glauber said.