U.S. Securities & Exchange Commission
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U.S. Securities and Exchange Commission

October 21, 2005

Karen P. Mohr
Director and Assistant General Counsel
Knight Equity Markets, L.P.
545 Washington Boulevard
Jersey City, New Jersey 07310

Re:

Direct Edge ECN LLC Purchase of ATTAIN ECN
No Action Relief Request

Dear Ms. Mohr:

In your letter of October 20, 2005, you inform us that Knight Capital Group, Inc. has formed an indirect, wholly owned subsidiary Direct Edge ECN LLC ("Direct Edge LLC") to acquire substantially all of the assets and assume certain liabilities related to the electronic communications network ("ECN") known as ATTAIN ECN ("ATTAIN ECN") from Domestic Securities, Inc. and certain of its affiliates and shareholders. You also represent that Direct Edge LLC is registered as a broker-dealer with the U.S. Securities and Exchange Commission ("Commission").

The Commission's Division of Market Regulation ( "Division") has previously taken the position that The ATTAIN ECN is an ECN as defined in the "ECN Amendment" to the Quote Rule1 and the Limit Order Display Rule2 (collectively the "Order Execution Rules") under the Securities Exchange Act of 1934, as amended ("Act"). The Division has stated that it would not recommend that the Commission take enforcement action against Nasdaq market makers who are participants in the ATTAIN ECN if those market makers enter orders into the ATTAIN ECN without modifying their public quotation, in compliance with the ECN Display Alternative. The Division set forth this position in a series of no-action letters, the first issued on February 4, 1998, and extended most recently on October 7, 2005.

You represent that upon consummation of the acquisition, Direct Edge LLC will rebrand ATTAIN ECN as the "Direct Edge ECN" and operate the "Direct Edge ECN" in substantially the same manner as the ATTAIN ECN, i.e., as an ECN in Nasdaq National Market and SmallCap Market securities (collectively, "Nasdaq Securities") pursuant to the rules of one or more national securities exchanges or national securities associations (collectively, "SROs").

In your letter, you request that the Division advise Direct Edge LLC that:

  1. Direct Edge ECN is an ECN as that term is defined in Rule 600(b)(23) of Regulation NMS;3
     
  2. Direct Edge LLC would be in compliance with the requirements of the Order Execution Rules with respect to any Nasdaq Securities for which a linkage between Direct Edge ECN and an SRO or the NASD Alternative Display Facility ("ADF") is operational and the Direct Edge ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative;4 and
     
  3. Upon compliance by Direct Edge ECN with the ECN Display Alternative, the Division would not recommend that the Commission take enforcement action against any OTC market maker or exchange market maker (as such terms are defined in the Order Execution Rules) 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.5
     

The Division hereby grants your request. Accordingly, the Division takes the position that upon consummation of Direct Edge LLC's acquisition of ATTAIN ECN, Direct Edge ECN will be an "electronic communications network" as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that Direct Edge ECN will be in compliance with the requirements applicable to the ECN Display Alternative set forth in the ECN Amendment6 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 under the ECN Amendment or the Limit Order Display Rules against any OTC market maker or exchange market maker (as such terms are defined in the Order Execution Rules) 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 relied on the following representations made in your letter of October 20, 2005:

  1. 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 ECN will be operated in "substantially the same manner" as ATTAIN ECN;
     
  3. Direct Edge LLC will establish a linkage with an SRO and/or the ADF and provide 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, will be 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 will be able to view the "top of the book" quote of the Direct Edge ECN displayed through the SRO or the ADF and will be 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 separate linkage system between such non-subscriber broker-dealer and the Direct Edge ECN;
     
  4. Direct Edge LLC will to respond to orders entered into the Direct Edge ECN through access to an SRO, or through the 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 will maintain 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 will charge 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,7 plus any fee charged to Direct Edge LLC by an SRO;
     
  5. 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
     
  6. 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 these representations 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 Securities Exchange Act of 1934 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.

Upon consummation of Direct Edge LLC's acquisition of ATTAIN ECN, the Division's no-action position with respect to ATTAIN ECN is withdrawn.

Sincerely yours,

Michael J. Gaw
Assistant Director


Endnotes

1 Formerly, 17 CFR 240.11Ac1-1. See Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290. The Quote Rule has been redesignated as Rule 602 of Regulation NMS under the Securities and Exchange Act, as amended, 17 CFR 242.602 ("Regulation NMS"). See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). Regulation NMS became effective as of August 29, 2005. In addition, the definition of "electronics communications network" is now contained in Rule 600(b)(23) of Regulation NMS.

2 Formerly 17 CFR 240.11Ac1-4, now resdesignated as Rule 604 of Regulation NMS, 17 CFR 242.604.

3 17 CFR 242.600(b)(23).

4 17 CFR 242.602(b)(5)(ii).

5 17 CFR 242.604.

6 17 CFR 242.602.

7 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/directedge102105.htm

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Modified: 10/21/2005