SEC Division of Trading and Markets no-action letter: Bloomberg Tradebook LLC

June 28, 2006

Mr. John M. Byrne Compliance Officer Bloomberg Tradebook LLC 731 Lexington Avenue New York, NY 10022

Re:

The Bloomberg Tradebook System

Dear Mr. Byrne:

In your letter dated June 28, 2006, you requested that the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") reaffirm its view that the Bloomberg Tradebook System ("System"), owned and operated by Bloomberg Tradebook LLC ("Bloomberg Tradebook"), a registered broker-dealer, is an electronic communications network ("ECN") as defined in Regulation NMS 1 under the Securities Exchange Act of 1934 ("Exchange Act") and would be in compliance with the requirements applicable to the ECN Display Alternative, as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule"), 2 with respect to NMS stocks 3 for which a linkage between the System and a self-regulatory organization ("SRO") is operational. The Division has previously taken that view in a number of no-action letters, most recently in November 2005. 4

The Division hereby grants your request. Accordingly, the Division will not recommend that the Commission take enforcement action against OTC market makers 5 or exchange market makers 6 who are participants in the System, if those market makers enter orders into the System without modifying their public quotations, in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"), 7 as applicable. In taking this position, the Division has relied on various representations you made regarding the operation of the System, specifically that:

The System is an ECN within the meaning of Rule 600(b)(23) of Regulation NMS and allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in certain NMS securities.

Bloomberg Tradebook will maintain a linkage with at least one SRO trading facility 8 or SRO display-only facility. 9 With respect to any SRO trading facility or SRO display-only facility with which Bloomberg Tradebook has established a linkage, Bloomberg Tradebook transmits to such SRO trading facility or SRO display-only facility for display in the SRO's montage the best-priced orders entered by, among others, OTC market makers and exchange market makers for those NMS securities in which they make markets (or act as specialists). With respect to orders displayed in an SRO trading facility, Bloomberg Tradebook provides to any registered broker-dealer access to such orders that is functionally equivalent to the access that is generally available for quotations displayed by an SRO trading facility. With respect to orders displayed in an SRO display-only facility, Bloomberg Tradebook provides to any registered broker-dealer, directly or through a third party, a level and cost of access to such quotations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock.

Bloomberg Tradebook responds and intends to continue to respond to orders in NMS securities in which it publishes its best bid and offer and associated sizes in SRO trading facilities and SRO display-only facilities delivered by non-subscribers as promptly as it responds to orders received from subscribers to execute against orders displayed in the System and in any event in substantially less than one second. 10

In connection with its highest-priced published buy orders and lowest-priced sell orders, Bloomberg Tradebook will charge non-subscriber broker dealers a rate that does not exceed the then current rate charged to a substantial proportion of its active broker-dealer subscribers, and in any event, no more than the maximum fee permitted under Rule 610 of Regulation NMS. 11

The System has sufficient capacity to handle the volume of trading reasonably anticipated to be conducted in the System. In addition, the System will conduct periodic review and testing to: (a) ensure future capacity, (b) identify potential weaknesses, and (c) reduce the risks of system failures and threats to system integrity.

The Division's no-action position is conditioned on Bloomberg Tradebook maintaining active connectivity with one or more SRO trading facilities or SRO display-only facilities. In the event that the System loses connectivity with an SRO trading facility or SRO display-only facility, Bloomberg Tradebook, with respect to that facility, would not be in compliance with the ECN Display Alternative and the no-action relief described herein would not be available. Bloomberg Tradebook represents that it continuously and systematically monitors its connections to each SRO trading facility and/or SRO display-only facility with which it has established a linkage.

The Division further conditions its position on the continuing accuracy of these representations and compliance by Bloomberg Tradebook 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, Bloomberg Tradebook — may require a different response. The Division may request additional representations from you regarding the operation of the System. 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, 12 and does not express any legal conclusions regarding the applicability of Section 11A or other statutory or regulatory provisions of the federal securities laws.

Sincerely,

Robert L.D. Colby Acting Director

Endnotes

1 See 17 CFR 242.600(b)(23).

2 17 CFR 242.602(b)(5)(ii).

3 See 17 CFR 242.600(b)(47).

4 See letter from Michael J. Gaw, Assistant Director, Division, to John M. Byrne, Compliance Officer, System, dated November 17, 2005.

5 See 17 CFR 242.600(b)(52).

6 See 17 CFR 242.600(b)(24).

7 17 CFR 242.604.

8 See 17 CFR 242.600(b)(72).

9 See 17 CFR 242.600(b)(71).

10 Bloomberg Tradebook does not now have a linkage with an SRO display-only facility, but if it were to establish any such linkage, it would not deliver any quotation in an NMS security to such facility unless (a) it delivered the same quotation to an SRO trading facility at the same time, or (b) Bloomberg Tradebook would contract with an established party engaged in the securities industry that would be able to provide order-delivery services on behalf of Bloomberg Tradebook. In the latter case, such a relationship would be established to provide meaningful access to the System's quotations displayed in such SRO display-only facility.

11 17 CFR 242.610. 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. See Securities Exchange Act Release No. 53829 (May 18, 2006) (extending compliance dates for Rule 610 and Rule 611 of Regulation NMS from June 29, 2006 to a series of dates, beginning on October 16, 2006, for different functional stages of compliance).

12 15 U.S.C. 78k-1.

Incoming Letter:

The Incoming Letter is in Acrobat format.

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Bloomberg

TRA~EIBOOKLK

Member NASOESIPC
Via c-mail: colbyr@sec.~ov
Robert L. D. Colby, Esq.
Acting Director
Division of Market Regulation
US. Securities and Exchange Commissioi~
Station Place
I00 F Street, N.E.
Washington, DC 20549-9303
Re: The Bhombfrg Tradcbook Svstem
Dear Mr. Colby:
On behalf of Bloomberg L.P., a Delaware limited partnership (""LP"), and its &iliate, Bloombcrg Tradebook LLC, a Delaware limited liability company ("Bloomberg Tradcbook"), we respectfully request that the Division of Market Regulation (thc "Division") extend its current no-action position regarding Bloo~nberg Tradebook activities. Bloomberg Tradebook is registered with the Securities and Exchange Comrnjssion (the "Commission'') as a broker-dealer and operates a computerized, proprietary trading System (the "Bloomberg Tradebook Systcm"), The Division has already taken a no-action position with respect to Bloomberg Tradebook and the Bloomberg Tradebook System, most recently extended on November 17,2005. Request for No-Action Relief Bloomberg Tradebook respectfilly requests that the Division advise Bloomberg Tradebook that:
1.. The Bloombcrg Tradebook System is an electronic communications network (an "ECN) within the mcaning of paragraph (b)(23) of Rule 600 of Regulation NMS for purposes of Rule 602 (the "Quote Rule") of Regulation NMS under the Securities Exchange Act of 1934;
2. Tlie Bloomberg Tradebook Systcm's method of operation will1
respect to NMS securities (as that tenn is defined in paragraph (b)(46) of Rule 600) for

Robert L. D. Colby, Esq.
June 28,2006 which a linkagc between thc Bloomberg Tradebook System and an SRO trading facility (as that tenn is dcfined in paragraph @)(72) of Rule 600), or an SRO display-only facility (as that tcrnl is defincd in paragraph (b)(71) of Rule 600) is operational and is in compliance with paragraph (b)(5)(ii) of thc Quote Rule (the "ECN Display Alternative"); and
3. The Division will not recommend that the Commission take
enforcement action under the Quote Rule against any exchange market maker (as that term is defined in,paragraph @)(24) of Rule 600) or OTC market maker (as that term is defined in paragraph (b)(52) of R~de 600) and will not recommend that the Comm,ission rake enforcement action under Rule 604 of Regulation NMS (the "Limit Order Display Rule") against any specialist or membcr of an exchaxge authorized by that excha~~ge to perform functions substantially similar to those of a spsciali,st ("Exchange-Authorized Member") or OTC market m,aker, as those terms are used in paragraph (a) of the Limir Order Display Rule, if such exchange market maker, specialist, Exchange-Authorized Member or OTC market maker transmits orders to the Bloomberg Tradebook System in reliancc on the assumpti,on that the Bloomberg Tradebook System is in compliance with tlie ECN Display Alternative and paragraph (b)(S) of the Lim,i,t Ord,er Display Rule with respect to such orders and if such exchange market maker, specialist, Exchange￾Authorized Member or OTC market maker ornits to take any other action that would otl~erwisc bc required if the Bloomberg Tradcbook System were not so in compliance with such provisions. Descrintion of the Bloomberg Tradebook System The Bloomberg Tradebook System provides broker-d,ealers and institutional clients with execution, clearance and settlement of tdcs in NMS securities and certain othcr securities via either the BLOOMBERG PROFESSIONAL Service or a computer-to-computcr connection.' The broker-dealer participants currently include OTC market makers and other broker-dealers and may in, future include exch,ange specialists and other registered brokcr-dealers. Orders displayed over the Bloomberg Tradcbook Systcm are available for execution in wl101,e or, where permitted under the terms of the order, in part. Within the Bloomberg Tradebook System, orders entered by pmtici,pants are disseminated to all oth,er participants. There is not any provision for certain specialist or market-maker priced orders to be entered but not included in the quotations furnished by the Bloomberg Tradebook System. In connection with the Bloomberg Tradebook System, Bloomberg Tradebook acts as introducing broker in arranging transactions inNMS securitiss and certain other securities. The BLOOMBERG PROFESSIONAL servicc is a worldwide, proprietary, electronic network available by subscription to investrncnl finns and olhor professjonals via more than 250,000 open￾architecture computer links worldwide. I

Robert L. D. Colby, Esq.
June 28,2006
Representations by Bloombere. Tradebook
In connection with its request for no-action relief, Bloomberg Tradebook makes the following representations with respect to all NMS sec~wities in whi,ch it seeks to operate as an ECN and to satisfy the requirements of the ECN Display Alternative pursuant to the rules ofa self-regulatory organization (an '"SRO):

1. Thc Bloomberg Tradebook System is an ECN withim the meaning
   of paragraph (b)(23) of Rule 600 for purposes of the Quote Rule and allows subscribers, including cxchangc market makers and OTC market makers, electronically to enter orders in NMS Securities;
2. The Bloomberg Tradebook System's method of operation with
   respect to NMS sccuriti,es for wl~icl~ a linkage betwee11 the Bloomberg Tradebook System and arl SRO trading facility or an SRO diqlay-only facility is operational and is jn ~ompliancewith the ECN Display Alternative;
3. Bloomberg Tradebook will maintain a linkage with at least one
   SRO trading facility or SRO display-only facility, With respect to any SRO trading facility or SRO display-only facility with which Bloomberg Tradebook has establisl~ed a linlcagc, Bloomberg Tradebook transmits to such SRO trading facility or SRO display￾only facility for display in the SRO's montage tl~ebest-priced orders entered by, among others, OTC market m,akers and exchange market makers for those NMS securities in which they make markets (or act as specialists). Wit11 respect to orders displayed in an SRO trading facility, Bloomberg Tradebook provides to any registered broker-dealer access to such orders that is functionally equiva1,ent to the access that is generally available for quotation,^ displayed by an SRO trading facility? With respect to orders displayed in au SRO display-only facility, Bloomberg Tradebook provides to any registered broker-dealer, directly or through a third party, a level and cost of access to such qu,otations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock;
4. Bloomberg Tradebook responds and intends to continue to respond
   to orders in NMS securities in which it publishes its best bid and offcr and associated sizes in SRO trading facilities and SRO display-only facilities delivered by non￾snbscribws as promptly as it responds to orders received from subscribers to execute against orders displayed in the Bloo~nberg Tradebook System and in any event in substantially less thau onc second. With respect to the SRO trading Facility, in which Functional equivalence docs not mean identical functionality. Bloomberg Tradebook is now and may in fututute remain an order-delivery ECN. As a result, it accepts orders, rather than executions, lrom the Nasdaq Market Center and may do so in future from other SRO trading facilities. 2

Roberi L.D. Colby, Esq.
June 28,2006
Bloo~nberg Tradebook participates as an order-delivery fm, access for non-subscribers to Bloomberg Tradebook's quotations displaycd in the SRO trading facility is via. the SRO trading facility's order-entry functionality. Bloomberg Tradebook does not now have a linkage with an SRO display-only facility, but if it were to establjsh any such linkage, it would not deliver any quotation in an NMS security to such facility unless (a) it delivered the same quotation to an SRO trading facility at the same time, or (b) Bloomberg Tradebook would contract with an established party engaged in the securities industry that would be able to provide order-delivery scrvices on bel~alf of Be Bloomberg Tradebook System. In the 1,atter case, such a relationship would be established to provide meaningful access to the Bloomberg ~radebook System's quotations displaycd in such SRO d,isplay-only facility;
5. Bloomberg Tradebook has in place procedures For monitoring
response tirncs For both subscribers and non-subscribers to the orders it displays in any of 111e SROs to which it has established a linkage and Bloomberg Tradebook takes prompt action if it observes any variance between the two;
6. In connection with its highcst-priced published buy orders and
lowest-priced sell orders, Bloomberg Tradebook will cl~arge non-subscriber broker-dealers a rate that docs not excced the then current rate charged to a substantial proportion of its active broker-dealer subscribers, and in any event, no more than the maximum fee permitted under Rule 610 of Regulation NMS;
7. The Bloomberg Tradebook System has sufficient ~apacity to
handle thc volume of Wading reasonably anticipated to be conducted in the Bloomberg Tradebook System. In addition, Bloomberg Trad,cbook will conduct perj,odic review and testing to: (i) ensure future capacity; (ii) identify potential weaknesses; and (iii) reduce the risks of system failures and threats to system integrity;
8. Bloomberg Tradebook continuously and systematicalJy rnon,ito~s
its connections to each SRO trading facility andlor SRO display-only facility with which it ha,s established a linkage. If the Bloomberg Tradebook system loses connecti,vity with any SRO Wading facility andlor any SRO display-only facility, Bloomberg Tradebook personnel will immediately contact the relevant facility to determine what action to take and will, as appropriate, cancel all quotations previously published by the system in such facility and notify its subscribers to advise thein of sucl~ interruption;
9. Bloomberg Tradebook has and will maintain procedures to ensure
that only certain, designated. employees of Bloolnberg Tradeboolr or B-Trade Services LLC will have access to information entered into the system, Bloolnberg Tradeboolc d,oes not maintain a proprietary trading desk nor does it trade for its own account. Those designated personnel will not disclose such infomation to persons other than such designated employees and will not use such information for Irading in Bloomberg Tradebook's own customers' accounts or their own personal tradin,g accounts. Operation of the system will be kcpt separate from other businesses of BLP; and

Robert L. D. Colby, Esq.
June 28,2006
Pagc 5
10. Bloombcrg Tradebook will comply with all mles of each SRO
trading facility and/or SRO display-only facility with which it has established a linkage regarding use of the SRO's facilities and obligations irnposed by the SRO to provide access to orders entered into the SRO's facilities. On the basis of the Foregoing, we respectfully request that the Division advise Bloomberg Tradebook as rcquesied abovc under "Requcst for No-Action Relief '. If you have my questions or seek any additional information regarding this request, please contact either me at (212) 617-3917 or Joseph Zangri at (212) 617-4345. Very tmly yaw.,