Don't pay your light bill and your electricity is cut off.
But that's not the way it is working in the controversial battle over access fees charged to dealers by electronic communication networks.
One ECN, NexTrade, which operates out of Clearwater, Fla., may or may not cut off some two dozen dealers who are refusing to pay these fees.
Among those facing a complaint by NexTrade are Nasdaq market makers Hill Thomson Magid, Lehman Brothers and Crowell, Weedon & Company, firms that have all filed their own counter-complaints and are in the initial phase of preparing for an NASD arbitration hearing.
"We don't believe we should be charged for something that we didn't order; something that we believe is triggered merely because we used SuperSOES on Nasdaq," according to an attorney for one of the dealers that NexTrade is dunning.
The attorney, who would not be quoted by name, said attorneys for the market makers contend NexTrade's actions amount to a frivolous lawsuit. "In some cases we're talking about bills for hundreds or just a few thousand dollars," he added. "It will cost a hell of a lot more than that to hire attorneys for this," he complained.
The attorney for the market maker noted the irony of the case: NexTrade, obviously fearing the loss of the flow of business, had not cut off many of the market makers from its services even though they were delinquent in payment.
However, he concedes that, although the ECNs want his client to pay, at the same time the flow of business from dealers is critical to the survival of the ECNs.
For NexTrade, survival is a thorny issue. It is one of the three smallest ECNs in terms of its share of Nasdaq trade executions: a negligible 0.2 percent of total volume in recent months, according to Nasdaq statistics.
Several attorneys said they thought the NASD arbitration, which is not expected to be held until sometime this month at the earliest, could set precedents for the continuing controversy over ECN access fees, charges that marker makers believe are unfairly imposed.
"There's no contract or implied contract in using the [NexTrade] ECN," according to George Casey, a partner and co-manager of Nasdaq trading for Crowell, Weedon & Co. "We're confident that our position will be upheld." He noted that using an ECN is, at times, inevitable when a market maker goes through the SuperSOES system.
NexTrade officials declined comment. They said that attorneys in the matter should avoid public statement. They stressed that the arbitration rules bar them from commenting on the issue until it is adjudicated.
"We would be prejudicing the case if we commented," said Daniel Caamano, the attorney for NexTrade, an expanding business in some areas that was hiring new employees last summer.
NexTrade has filed an application to become a stock exchange and a futures exchange. Business, said NexTrade officials in its third quarter report, has been booming. In the quarter ending Sept. 30th, NexTrade reported record profits. The NexTrade ECN is offering 24-hour a day trading through participating broker dealers.
The Security Traders Association, with both market making and ECNs as members, has taken a middle-of-the-road position on this touchy issue, which is being watched closely by much of the industry.
"ECN customers must pay an access fee for the use of a network when they buy or sell securities," the STA said in a prepared statement. "Market makers, on the other hand, have not been permitted to charge fees to ECNs or to other market makers to effect a transaction. This situation creates an inequity that must be addressed."
The organization also said it is against any requirement that forces a market maker to incur a fee in order to satisfy best execution requirements. John Giesea, the new STA president, called on the regulators to clear up the basic "inequity" of access fees. Giesea said that market makers can be charged, but they can't charge their customers. STA officials called on the SEC to clarify when access fees can be imposed. Clarifications are needed, several market participants privately said, because arbitration panels have not been clear.
For example, in late 2000, an NASD resolution panel decided a case in favor of an alternative trading system. It awarded Bloomberg Tradebook some $90,000 plus interest that it had been trying to recover from U.S. Bancorp Piper Jaffray. U.S. Bancorp Piper Jaffray held that Bloomberg's trading practices violated securities regulations.
Cut Off
But Bloomberg noted that the brokerage was paying 1.5 cents per share for several months on transactions in 1997, then ignored the bills, but continued to use the service until it was cut off.
That time the panel sided with Bloomberg. However, late in 1999, another NASD arbitration group largely sided with Knight Securities. Although it required Knight to pay All-Tech, an ECN, some $3,800 with interest for an overdue bill, All-Tech had been asking for close to $600,000.
Although All-Tech was claiming victory, its chief counsel was quoted as saying, "We are somewhat curious how arbitrators arrived at the dollar amount of the award." The access fee is a hot potato that Harvey Pitt, the new SEC chairman, inherited. He inherited the controversy from his predecessor, Arthur Levitt, who criticized access fees and asked his staff to restore "a fair competitive balance between dealers and ECNs." An attorney for one of the market makers said their counter complaint contains many of Levitt's comments. "We're required to obtain best execution, yet we end up using ECNs even though we don't want to," said the attorney for one of the market makers, declining to be quoted by name. An SEC spokesman didn't respond to requests for comment.
