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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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August 31, 2002

At Deadline

By Editorial Staff

Patent

*Direct access vendor Lava Trading is threatening legal action against competitors over patent infringement. Lava notified direct access firms offering ECN aggregation that their systems violate a patent on its ColorBook front-end. ColorBook made a big splash last year as the first vendor-built trading system to aggregate and provide access to every quote on multiple ECNs. Now used by 11 of the top investment banks, according to Lava, it was patented in August 2001. In the wake of its success, several direct access firms have begun offering similar functionality.

Lava has engaged a law firm to press its case. "They have a patent and we will be seeking to enforce their intellectual property rights," said Bob Hanlon of Coudert Brothers. Patent No. 6,278,982 describes ColorBook as a "securities trading consolidation system" that allows traders to "conduct security transactions with two or more ECNs, or other comparable ATSs." One competitor who received an accusatory letter from Lava likened the action to "patenting the wheel."

Fee Brawl

*Track ECN is the latest electronic communications network caught up in the battle over access fees. Huberman Financial, a Dallas dealer, is angry with the New York ECN for billing it, contending that it is trying to "extort" fees from the firm, which must use SuperSoes to effectively compete. "It is difficult to understand how your company, in good conscience, would try to force firms to pay for a service they said they do not want...," Huberman officials wrote in a letter to Track ECN. But a spokesman for the ECN noted that Huberman must pay. "We tell all our brokers or market makers, who do not want to pay our fee, to route away from SuperSoes (where we are) and to use their direct connections."

Shut Down

*NASD Regulation has shut down MarketXT, the formerly high-flying ECN. Industry sources say the regulator took action after MarketXT failed to pay $2 million owed to its former clearing firm, Southwest Securities. The liability caused MarketXT's capital to fall below the required minimum, placing the firm in violation of NASD rules. MarketXT dropped Southwest at the end of July for Penson Financial Services. Shortly thereafter it stopped trading. NASD-R ordered the cessation after Southwest notified the regulator of the outstanding obligation, sources said. Neither NASD-R nor MarketXT would comment. In any event, the cessation is a dramatic comedown. MarketXT was acquired just two years ago by e-broker Tradescape for stock worth $100 million. The last year has been a turbulent one for Market XT. The ECN's volume - which was previously negligible - skyrocketed. The surge followed MarketXT's unprecedented decision to grant automatic SuperSoes executions against its book. Its success was not without controversy. Some claim the ECN artificially inflated the numbers through computerized proprietary trading.

SuperMontage

*uperMontage must now meet the expectations of Nasdaq, following approval of the advanced trading system by the Securities and Exchange Commission. Nasdaq president Richard Ketchum, called the SEC approval a "big win for investors." He said that, "SuperMontage will open a new window on the trading of stocks, providing a clearer view of market activity and an increased amount of information to investors." Dean Furbush, executive vice president of Nasdaq Transaction Services said that, "SuperMontage will make it easier for market participants to access depth of trading interest due to the system's five levels of dynamically displayed depth."