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August 23, 2005

Competition and Compliance in the New World

By Peter Chapman

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(Traders Magazine, August 2005) -- The New York Stock Exchange buys the Archipelago Exchange. Nasdaq buys Inet. The Securities and Exchange Commission votes in a new trade-through rule. What does it all mean? A roundtable convened by network provider BT Radianz at the Securities Industry Association's annual technology conference attempted to figure it all out. Brennan Carley, BT Radianz' chief technology officer, moderated a panel of five industry executives.

Participants included Joe Sommer, co-head of electronic trading at UBS, a brokerage; Eric Goldberg, the chief executive of Portware, a vendor of front-end trading systems;

George Hessler, of Lava Trading, a vendor of front-end and order management systems; Marty Kaye, chief executive officer of the Track ECN; and Dan Kramer, an executive with Thomson Financial. Below are excerpts.

Topic: Given the mergers underway at the industry's two largest marketplaces, the participants discussed whether there was still room for smaller players such as regional exchanges. The subject of ECNs merging with regional exchanges was broached.

Marty Kaye, Track ECN

At Track ECN, we are looking to partner with other people. We've been speaking to exchanges as well. I expect that all of the exchanges would like to go all electronic and would like to be able to compete as well as they can against the duopoly. I think they will be able to do that. I think most of the people we speak to our clients would like to see many viable entities to ensure there is fair pricing.

We just recently saw the Philadelphia Exchange take on two new partners - Citadel and Merrill. I think there's just going to be more of that. As I said, we are looking at different partners and talking about ways to create a viable entity.

I think all the regional exchanges are looking to do the same. I think you're going to see that either the regionals are going to develop their own ECN type of connectivity or they're going to partner up with an ECN. They may add some liquidity providers as partners who can help make them a more viable entity. In any event, I'd be surprised not to see numerous places to trade besides the two big guys that have been created recently.

I think it's highly unlikely that Reg NMS will happen within the time frame they've set. Some of the bigger houses will ask for additional time. There is certainly no way to put this in without having everybody on board. There are just too many regulations that would result in massive fines and other sort of penalties for not executing in accordance with NMS. So it's clear that they're going to make sure everybody's ready to go.

Dan Kramer, Thomson

I would agree with Marty. I think we have a unique combination of ECNs. They will require scale in order to thrive in the new world post NMS. And the regional exchanges will require technology in order to thrive. So, I think with both of those groups seeking partners or seeking new capabilities, further partnerships are inevitable.

Eric Goldberg, Portware