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August 9, 2006

ECNs Want More Time to Get Off Nasdaq

By Gregory Bresiger

ECNs are petitioning the Securities and Exchange Commission to delay its approval of Nasdaq's new ECN pricing scheme and the consolidation of Nasdaq trading platforms. The some half-dozen quasi-stock exchanges, upset with Nasdaq's changes, say they must leave Nasdaq and find a new market center through which to represent their quotes. But the process is not simple. Nasdaq wants to implement its changes quickly. The ECNs- BATS and Bloomberg Tradebook among them-are asking for a six-month delay for their transition.

Nasdaq, which hopes to go to a single trading book this summer, wants ECNs to pay new fees and accept automatic executions against their quotes, a sore point with the ECNs.

ECN officials say this is part of a Nasdaq strategy to destroy them by using fees that create an uneconomic model and speeding up the trading conversion process.

For their part, Nasdaq officials say they're merely trying to improve the efficiency of their market. "When you are trying to run an automated market, and you are sending orders out in priority to [an ECN] and asking them to hurry up and execute, you have no control over their capacity," said Chris Concannon, executive vice president for Nasdaq Transaction Services. "Your capacity is their capacity. It makes your market slow down to the most inferior participant: the order delivery participant."

Also, Nasdaq has waited long enough to consolidate platforms, Nasdaq officials say. They are not forcing anyone out, but trading firms must be ready for an auto-execution environment. But an ECN official says Nasdaq wants to destroy them.

"The proposal would force ECNs to accept auto-executions, which would cause a race condition, resulting in duplicate executions. Because ECNs are not capitalized for principal trades, duplicate executions could cause economic hardship," according to a comment letter by C. Thomas Richardson, a managing director with Citigroup.

BATS, one of the smaller ECNs, has been able to find a new venue, the National Stock Exchange (NSX). However, some sources told Traders Magazine that there are still capacity issues at the NSX, with Nasdaq's INET eating up most of the space. Trading sources said this leads to more locked and crossed markets on the NSX, with angry clients canceling business with BATS.

Kim Bang, an executive with Bloomberg Tradebook, said in a letter to the SEC that BATS' daily volume has been reduced by 50 percent since it transferred to the National Stock Exchange (NSX). Dave Cummings, chief executive of BATS, agreed that the transition for his firm has been difficult. Bloomberg Tradebook, still looking for another venue, will have a more difficult time finding one than BATS, said another ECN official. "Bloomberg has much bigger technical challenges with a move," said the trading executive. "They have a large institutional order base. They need more time." But Bang, in his letter, agreed that Bloomberg has a bigger problem than BATS. "Bloomberg Tradebook is not a feasible candidate for a quick move to the old NSX platform because it lacks sufficient capacity." But NSX Chief Executive Officer David Colker blamed Nasdaq's INET for the problem.

ECNs have also rejected the suggestions of Nasdaq officials that they consider the NASD's Alternative Display Facility (ADF). ECN officials believe the ADF would not be effective because it has high connectivity costs, has no general revenue sharing plan and has no ability to quote in exchange listed securities other than Nasdaq securities.

But Nasdaq argues that securities law supports no calls for a six-month delay in changing its system. Nasdaq notes it filed its new automatic execution fee plan in February. The plan was published in the Federal Register in April and the comment period is over. The SEC declined comment.