March 3, 2006

Karen P. Mohr
Director and Associate General Counsel
Knight Capital Group, Inc.
545 Washington Boulevard
Jersey City, NJ 07310

Dear Ms. Mohr:

In your letter, dated February 23, 2006, you indicate your intent to implement certain new features to the Direct Edge ECN.¹ Specifically, as further described in a concurrent amendment to Form ATS, Direct Edge LLC will offer subscribers (i) an option to route Nasdaq securities² orders to other accessible market centers, and (ii) enter "market" type orders. You request that we reconfirm our no-action position with respect to Direct Edge ECN's status as an "electronic communications network" ("ECN") notwithstanding the changes to the operation of Direct Edge ECN.

The Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") has previously taken the position that the Direct Edge ECN is an ECN as defined in Rule 600(b)(23) of Regulation NMS³ under the Securities Exchange Act of 1934 ("Exchange Act"), and is in compliance with the requirements applicable to the ECN Display Alternative⁴ set forth in the ECN Amendment with respect to Nasdaq National Market and SmallCap Market securities for which a linkage between Direct Edge ECN and one or more national securities exchanges or national securities associations (collectively, "SROs") or the NASD Alternative Display Facility ("ADF") is operational, and Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division stated that it would not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker for entry into the Direct Edge ECN of: (i) orders without modifying their public quotations in compliance with the ECN Display Alternative and (ii) customer limit orders, in compliance with the Limit Order Display Rule. The Division set forth this position in a no-action letter issued on October 21, 2005 (the "October Letter").⁵

In the October Letter, the Division relied on various representations regarding the operation of the Direct Edge ECN, including that Direct Edge ECN would operate in substantially the same manner as ATTAIN ECN. You state that, in light of the new functionality available to Direct Edge ECN subscribers, this will not be the case. However, you represent that the new functionality does not impact the linkages between the Direct Edge ECN and the SROs and ADF or the manner in which the Direct Edge ECN book will be displayed. Your letter also reconfirms each of the other representations specified in the October Letter. On that basis, you request that the Division confirm its earlier no-action position.

The Division hereby grants your request. The Division continues to take the position that Direct Edge ECN is an "electronic communications network" as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that Direct Edge ECN continues to be in compliance with the requirements applicable to the ECN Display Alternative as described in Rule 602(b)(5)(ii) of Regulation NMS⁶ with respect to Nasdaq securities for which a linkage between Direct Edge ECN and an SRO or the ADF is operational and Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division will not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker for entry into the Direct Edge ECN of: (i) orders without modifying their public quotations in compliance with the ECN Display Alternative; and (ii) customer limit orders, in compliance with the Limit Order Display Rule. In taking this position, the Division relies on the following representations made in your letter dated February 2, 2006:

1. Direct Edge ECN is registered with the Commission as a broker-dealer and is a member of the NASD. Direct Edge LLC operates as an alternative trading system known as the Direct Edge ECN pursuant to Regulation ATS⁷ under the Exchange Act. The Direct Edge ECN is an electronic trading system that allows subscribers, including OTC market makers and exchange market makers, to enter orders in Nasdaq securities for dissemination to other subscribers, and permits other subscribers to effect executions, in whole or in part, against such orders;
2. Direct Edge LLC has established a linkage with an SRO and/or the ADF and provides broker-dealers access to certain orders. All subscriber orders at the "top" of the Direct Edge ECN book, i.e., best bid/ask by time priority, are aggregated by security and subscriber's choice of display venue (i.e., an SRO or the ADF) and transmitted to either such SRO or the ADF, respectively, for display. Non-subscriber broker-dealers are able to view the "top of the book" quote of the Direct Edge ECN displayed through the SRO or the ADF and are able to execute against the quotes in an SRO montage via such SRO's platform or execute against quotes displayed in the ADF either via an SRO platform or through a private linkage system between such non-subscriber broker-dealer and the Direct Edge ECN;
3. Direct Edge LLC responds to orders entered into the Direct Edge ECN through access to an SRO, or through a private linkage system to the Direct Edge ECN for quotes displayed in the ADF, no slower than Direct Edge ECN responds to ordered entered directly by subscribers into Direct Edge ECN, and in any event in no more than a few seconds. Direct Edge LLC maintains a team of duly registered personnel to receive and execute orders received telephonically from subscriber and non-subscriber broker-dealers against Direct Edge ECN orders displayed in an SRO montage or the ADF. Direct Edge LLC charges non-subscriber broker-dealers a rate no more than the fee Direct Edge LLC charges a substantial portion of its active broker-dealer subscribers, and in any event no more than $0.009 per share,⁸ plus any fee charged to Direct Edge LLC by an SRO;
4. Direct Edge ECN has sufficient capacity to handle the volume of data reasonably anticipated to be conducted in Direct Edge ECN. Direct Edge LLC will conduct periodic reviews and testing to: (i) ensure future capacity, (ii) identify potential weaknesses, and (iii) reduce the risks of system failures and threats to system integrity; and
5. Direct Edge LLC has put in place and will maintain procedures to ensure that only certain designated personnel have access to the Direct Edge ECN. Those designated personnel will keep all trading information entered into Direct Edge ECN confidential, and will not use such information for trading in any proprietary account of Direct Edge LLC or its affiliates, including Knight, Knight Equity Markets, L.P., Knight Capital Markets LLC, and Direct Trading Institutional L.P., its or their customers' accounts, or such personnel's own personal trading accounts. The operation of Direct Edge ECN will be kept separate from the other business of Knight and its affiliates.

The Division conditions its position on the continuing accuracy of the representations listed above and compliance by Direct Edge LLC with all applicable Commission and SRO rules, including any additional requirements applicable to ECNs. Any different facts or conditions - including but not limited to, modifications or revisions to, or expansion of service provided by, Direct Edge ECN - may require a different response. The Division may request additional representations from you regarding the operation of Direct Edge ECN. This no-action position is subject to changes in current law, regulation, and interpretations; any such change may require the Division to reevaluate and withdraw or modify this position. This no-action position concerns enforcement action under Section 11A of the Exchange Act only, and does not express any legal conclusions regarding the applicability of Section 11A or other statutory or regulatory provisions of the federal securities laws.

Compliance with the ECN Display Alternative depends in many respects on the practical effect of the operational conditions established by Direct Edge ECN and the manner of operation of the linkage between Direct Edge ECN and the SRO or members of the ADF. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.

The Division's October Letter is hereby withdrawn.

Endnotes

---

¹ As explained in your letter, the Direct Edge ECN is owned and operated by Direct Edge ECN LLC ("Direct Edge LLC"). Direct Edge LLC is a broker-dealer registered with the Securities and Exchange Commission ("Commission") and an indirect, wholly-owned subsidiary of Knight Capital Group, Inc., a Delaware corporation. Direct Edge LLC acquired substantially all of the assets and assumed certain liabilities related to the ATTAIN ECN from Domestic Securities, Inc., a New York Corporation, and certain affiliates and shareholders thereof on October 21, 2005. The ATTAIN ECN was promptly re-branded as the Direct Edge ECN.

² The term "Nasdaq security" is defined in Rule 600(b)(41) of Regulation NMS, 17 CFR 242.600(b)(41).

³ 17 CFR 242.600(b)(23).

⁴ The ECN Display Alternative is set forth in Rule 602(b)(5)(ii) of Regulation NMS, 17 CFR 242.602(b)(5)(ii).

⁵ See letter from Michael J. Gaw, Assistant Director, Division, Commission, to Karen P. Mohr, Director and Assistant General Counsel, Knight Equity Markets, L.P., dated October 21, 2005.

⁶ 17 CFR 242.602(b)(5)(ii).

⁷ 17 CFR 242.300-303.

⁸ The Division notes that Rule 610(c) of Regulation NMS, 17 CFR 242.610(c), generally limits the fee that a trading center may charge for accessing a protected quotation to no more than $0.003 per share. Rule 610(c) became effective as of August 29, 2005, and is subject to delayed compliance to be implemented in two phases. See Securities Exchange Act Release 51808 (June 9, 2005), 70 FR 37496, 37576 (June 29, 2005).

http://www.sec.gov/divisions/marketreg/mr-noaction/directedge030306.htm