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February 1, 2003

SEC Hears More on Locked Markets

By Gregory Bresiger

The refusal of Instinet and Island to use the SuperMontage platform is causing more locked and crossed markets, a problem which splinters trading and hinders executions. That's what Nasdaq officials were telling SEC officials who met with them recently at One Liberty Plaza in New York City.

The meeting, held at Nasdaq's New York offices, included top level officials from various SROs. Nasdaq officials won't speak about this meeting for the record. But sources say that they asked for the SEC to take action, possibly requiring the two huge ECNs to join the SuperMontage.

The Nasdaq official, who spoke on the condition of anonymity, said ECNs that participate in the SuperMontage are having no problem with locked and crossed markets. But those not using the platform are slowing the market, the official said.

Indeed, Brian Pears, head of equity trading at Victory Capital Management, said the problem is "serious." "That's because the Alternative Display Facility allows participants to exist outside of SuperMontage," Pears said. (Pears is also a columnist for the Traders Magazine Website Traders Online,

"We are getting locked or crossed markets when someone outside the system trades within the system," said the Nasdaq official. Why doesn't Island/Instinet simply join SuperMontage? he asked. "It's because they don't want to give up their access fees," the official said.

Neither SEC nor Island/Instinet officials will comment publicly on the meeting. However, privately Island/Instinet officials say Nasdaq feels "under tremendous competitive pressure" because they won't join SuperMontage. "Nasdaq is trying to degrade the market," complained one Island/Instinet official. "They want to do that by pretending to be the friend of the individual investor. But they also want to make it difficult for us to operate," he said.

The Island/Instinet official noted that his firm will have its own meeting with the SEC. "We don't have the same view of locked and crossed markets that Nasdaq does. A locked market sometimes means a zero spread. We think that is very good for the investor," the Island/Instinet official said.

Cincinnati Stock Exchange officials, who were at the SEC meeting in New York, said Nasdaq's complaints are unfounded. "There is no credible evidence that Island/Instinet is purposely locking and crossing the markets," according to David Colker, executive vice president and coo of the Cincinnati Stock Exchange.

Linked Markets

"My sense is that it is unclear whether this is a problem in the first place. It probably would be best just to let the market sort things out without new rules," he added. However, Colker said market executions would be improved if there were linkages between all the major market exchanges, which he contends Nasdaq resists. Island records its Nasdaq transactions at the Cincinnati.

Island/Instinet officials privately have said they think the SEC's staff interest is a bad sign. They said that the permanent officials of the SEC are more likely to favor traditional exchanges over electronic firms.