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Jared Dillian
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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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July 31, 2003

Court Rejects ECN's Case on SEC

By Gregory Bresiger

Domestic Securities, the parent of Attain ECN, has lost part of a lawsuit against the SEC - a lawsuit in which it claimed it didn't provide sufficient notice of how orders would be handled on Nasdaq's SuperMontage platform, or that access fees would be levied.

A federal appeals court held that Domestic Securities' lawsuit was tardy and that it had not made its case that the Securities and Exchange Commission had acted in an arbitrary manner. Domestic Securities also contended the SEC had wrongly approved an alternate price-quote system for the SuperMontage.

The system can execute orders at the best price available, or orders can be sent to a particular market maker or ECN. If an ECN rejects a trade, then it is knocked out of the system and it will return to the back of the line. That can be risky because the system rewards those who are the first to offer the best prices.

Nasdaq calls this process "decrementation." Domestic Securities, in papers filed with the District of Columbia Circuit Court of Appeals, called it unfair. But the court held that Domestic Securities had ample opportunity to comment on Nasdaq trading practices and didn't. ECNs many times have the best limit order prices. However, their prices don't include additional access fees charged by some including Attain ECN.

Although the court backed the SEC approval of Nasdaq's trading practices, it is not a definitive ruling. Therefore, the dicey issues of access fees and market linkages are still to be resolved.