Commentary

Jos Schmidt
Traders Magazine Online News

Reducing the Regulatory Burden on Public Companies, Yes Please But...

In this commentary, NEO's Jos Schmidt discusses regulatory requirements and needs in the Canadian equity markets.

Traders Poll

Are you concerned about foreign ownership of a U.S. stock exchange?



Free Site Registration

April 30, 2003

An ECN Plot To Corner Market? Archipelago Accuses Duo of Unfair Practices

By Peter Chapman

Also in this article

  • An ECN Plot To Corner Market? Archipelago Accuses Duo of Unfair Practices

The two largest ECNs jointly sought to drive their toughest competitors out of business with discriminatory pricing policies.

That's what Archipelago Securities is charging in a claim it has brought against Instinet and its Island division in an NASD arbitration.

Archipelago Securities, the successor entity to the now-defunct Archipelago and REDIBook ECNs, alleges Instinet and Island colluded to protect their market shares.

Archipelago filed the claim in February against Instinet, seeking upwards of $120 million in damages. The claim is Archipelago's second against Instinet in the past nine months. Last fall, Archipelago filed a related counterclaim against Island seeking about $90 million.

That counterclaim came in response to an action initiated by Island in September against Archipelago and its REDIBook unit. Island alleged the pair did not pay their bills in full for accessing its quotes. Island also made the same charges against Bloomberg TradeBook, which then launched a $2.75 million counterclaim.

Altogether, Island is asking for $11.1 million from the three ECNs. All charges are being considred by NASD-R under arbitration.

Island, in its claim, alleged Archipelago, REDIBook and TradeBook stopped paying their contractual rates in the spring of 2002. The trio then paid a lower rate available only to "standard" broker dealers, according to Island. (ECNs are technically broker dealers. "Standard" broker dealers are firms such as Merrill Lynch and Morgan Stanley.)

Under Island's pricing plan, broker dealers were charged 19 cents for every 100 shares accessed while the three respondents in the arbitration were charged 50 cents. Island instituted the two-tiered pricing structure for Nasdaq securities in January 2001. Previously, it charged all subscribers the same rate: 25 cents per hundred shares. Now the three ECNs were required to pay 50 cents.

Archipelago says Instinet, a separate company at the time, then adopted a two-tier schedule. Instinet's regular rate was roughly 40 cents per hundred shares. It charged Archipelago approximately 60 cents.

"Both Instinet and Island simultaneously instituted what they called a hit-and-take' rate which, on the OTC side, was twice as big as the broker dealer rate," said Kevin O'Hara, Archipelago's chief administrative officer and chief counsel.

Unequal Application

O'Hara claims the new pricing regime was not applied equally to all ECNs - just those deemed a threat. GlobeNet, for example, an ECN bought by Archipelago last year, was not required to pay the higher rate, according to O'Hara.

GlobeNet was billed at the higher rate, but told it need only pay the regular rate. GlobeNet, one of the smallest ECNs, apparently never traded enough Nasdaq shares to represent a threat.

O'Hara asserts Island and Instinet billed GlobeNet at the higher rate to "maintain a regulatory cover." In other words, the documentation would convey the impression all ECNs were being charged at the same rate. O'Hara admits Archipelago stopped paying the higher rate, but maintains the pricing scheme was illegal.

"They scientifically determined who their real competitors were," he said. "They were targeting what I call competitive competitors' and attempting to hurt them. That ultimately hurts the market and investors. These are violations of our contract, violations of Reg ATS, and potentially, violations of anti-trust law," according to O'Hara.