SEC Division of Trading and Markets no-action letter: Direct Edge ECN

June 28, 2006

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

Re: Direct Edge ECN

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 Direct Edge ECN ("System"), owned and operated by Direct Edge ECN LLC ("Direct Edge LLC"), 1 is an electronic communications network ("ECN") as defined in Regulation NMS 2 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"), 3 with respect to NMS stocks 4 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 March 2006. 5

The Division hereby grants your request. Accordingly, the Division will not recommend that the Commission take enforcement action against OTC market makers 6 or exchange market makers 7 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"), 8 as applicable. In taking this position, the Division has relied on various representations you made regarding the operation of the System, specifically that:

(i) Direct Edge LLC is registered with the SEC as a broker-dealer under Section 15 of the Exchange Act and is a member of the NASD and the National Stock Exchange. Direct Edge LLC operates an alternative trading system known as the Direct Edge ECN pursuant to Regulation ATS 9 under the Exchange Act. The System is an "electronic communications network" as defined in Regulation NMS, 10 and permits OTC market maker and exchange market maker subscribers electronically to enter orders in NMS stocks directly into the Direct Edge ECN order book.

(ii) Direct Edge LLC has established and will maintain an automated linkage with one or more SRO trading facilities 11 and/or SRO display-only facilities 12 and provides to such SRO trading facilities and/or SRO display-only facilities the "top of book," i.e., best bid/ask by time priority, aggregated by choice of display venue and security symbol for all orders displayed to more than one subscriber in the Direct Edge ECN order book for inclusion in the quotation data made available by such SRO trading facilities and/or SRO display-only facilities to vendors pursuant to the Quote Rule.

(iii) The System accepts only orders that can be automatically executed pursuant to their terms and will not post any "manual quotations." 13

(iv) Non-subscriber broker-dealers that have access to an SRO trading facility and/or SRO display-only facility are able to: (i) view the "top of the book" quotes of the System displayed through such SRO trading facility or SRO display-only facility; and (ii) effect a transaction against the quotes contained in: (a) an SRO trading facility montage, via such SRO trading facility's platform; or (b) an SRO display-only facility, either via an SRO trading facility's platform (assuming any quote entered in an SRO display-only facility is also displayed in the SRO trading facility), or through a private linkage system between such non-subscriber broker-dealer and the System. Direct Edge LLC will provide to such non-subscriber broker-dealers: (A) for System quotes displayed on an SRO trading facility, access to such quotes that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility, or (B) for System quotes displayed in an SRO display-only trading facility, 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, respectively.

(v) Direct Edge LLC responds to orders entered into the System through access to an SRO trading facility, or through a private linkage system to the System for quotes displayed in an SRO display-only facility, no slower than the System responds to orders entered directly by subscribers into the Direct Edge ECN book.

(vi) 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, plus any fee charged to Direct Edge LLC by an SRO trading facility or SRO display-only facility. Direct Edge LLC will comply with the applicable fee limitations for non-subscriber broker-dealers pursuant to Regulation NMS. 14

(vii) The System has sufficient capacity to handle the volume of data reasonably anticipated to be conducted in the System. Direct Edge LLC conducts 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.

The Division's no-action position is conditioned on Direct Edge LLC maintaining active connectivity with one or more SRO trading facilities or SRO display-only facilities. In the event that Direct Edge LLC loses connectivity with an SRO trading facility or SRO display-only facility, Direct Edge LLC, 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. Direct Edge LLC represents that it continuously and systematically monitors its connections to SRO trading facilities and/or SRO display-only facilities. Direct Edge LLC further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, Direct Edge LLC personnel will immediately cancel all quotes previously published by the System in that facility and notify its subscribers to advise them of such interruption.

The Division further 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 LLC - 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 15 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.

Sincerely,

Robert L.D. Colby Acting Director

Endnotes

1 Direct Edge LLC is a broker-dealer registered with the Commission and an indirect, wholly-owned subsidiary of Knight Capital Group, Inc., a Delaware corporation ("Knight").

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

3 17 CFR 242.602(b)(5)(ii).

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

5 See letter from Robert L.D. Colby, Acting Director, Division, Commission, to Karen P. Mohr, Director and Associate General Counsel, Knight, dated March 3, 2006.

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

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

8 17 CFR 242.604.

9 17 CFR 242.300-303.

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

11 17 CFR 242.600(b)(72).

12 17 CFR 242.600(b)(71).

13 17 CFR 242.600(b)(37)

14 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 for different functional stages of compliance).

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

Incoming Letter:

The Incoming Letter is in Acrobat format.

Supplemental Notice:

A Supplemental Letter dated July 23, 2007 is in Acrobat format.

A Supplemental Letter dated September 28, 2007 is in Acrobat format.

A Supplemental Letter dated December 23, 2008 is in Acrobat format.

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Knight Capital Group, lnc.
545 Waskllngton Boulevard
Jersey City, New Jersey 07310
Te1 201.222.9400
Fax 201.557.6853
Poll Free 800.544.7508
Director and www.knight.com Associate General Counsel Tel: (201) 557-6809 Fax: (201) 557-8039 Email: kmohr@knight.com VIA FEDERAL EXPRESS CONFIDENTIAL Acting Director Division of Marlcet Regulation U.S. Securities and Exchange Cornmission 100 F Street, NE Washington, DC 20549 RE: Direct Edge ECN LLC

Extension of No-Action Relief

Dear Mr. Colby:
Reference is made to the no action letter (the "No Action Letter"), dated March 3, 2006, issued by the Division of Market Regulation (the "Division") of the U.S. Securities and Exchange Commission (the "Commission?'), to Direct Edge ECN LLC ("Direct Edge LLC"), a broker-dealer registered with the Commission and an indirect, wholly-owned subsidiary of Knight Capital Group, Inc., a Delaware corporation ("Knight"). Based upon representations made to the Division in a letter from Direct Edge LLC to the Division dated February 23, 2006, the Division took the position in the No Action Letter that the Direct Edge ECN, an alternative trading system sponsored by Direct Edge LLC is: (i) an "electronic communications network" as defined in Rule 600(b)(23) of Regulation NMS' promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); and (ii) in compliance with the requirements applicable to the ECN Display ~lternative~ with respect to Nasdaq securities for which a linkage between the Direct Edge ECN and one or more national securities exchanges or national securities associations (collectively, "SROs") or the National Association of Securities Dealers, Inc. ("NASD") Alternative Display Facility ("ADF") is operational and Direct Edge ECN provides access to certain orders ' 17 CFR 242.600(b)(23) 17 CFR 242.602(b)(5)(ii)

pursuant to the terrns of the ECN Display Alternative. In addition, the Division agreed that it would not recommend that the Commission talte enforcement action against any OTC market maker or exchange market malter (as such terms are defined in the Order Execution ~ules)) for entry into the Direct Edge ECN of: (a) orders without modifying their public quotations in compliance with the ECN Display Alternative; and (b) customer limit orders, in compliance with the Limit Order Display Rule4. The No Action Letter expires by it terrns on June 28, 2006. Accordingly, Direct Edge LLC hereby respectfully requests that the Division extend their no-action position vis-a-vis Divect Edge ECN, both in terms of time and to include trading of all NMS stocks5 on the Direct Edge ECN. To support such extension, Direct Edge LLC makes the following representations upon which the Division may rely:

1. Direct Edge LLC is registered with the SEC as a broker-dealer under Sectioii
   15 of the Exchange Act and is a member of the NASD and the National Stoclc Exchange. Direct Edge LLC operates an alternative trading system known as the Direct Edge ECN purstiant to Regulation under the Exchange Act. The Direct El;Ege ECN is an "electronic communications network" as defined in Regulation NMS~,acld pcrnits OTC market rnakcr and cxchangc marlict maker s~ll2scribel-selectl*onicallyto enter orders in N MS stocks direct1y into the Dii-ectEdge ECN order book. 17 CFR 242.602 and 17 CFR 242.604 17 CFR 242.604 17 CFR 242.600(b)(47) 17CFR242.300-303 See Footnote 1, supra 7

2. Direct Edge LLC has established and will maintain8 an automated linkage
   with one or Inore SRO tradi~~grjcilities9 and/or SRO display-only faciliiies"' and providcs to such SRO tradi12g facilities al~d!or SRO display-only fiicilities" the "top of hook", i.e.. best bidiasl; by time priority. aggregated by clroice of display venue and security s>mbolfor ali orders displayed to more than one subscriber" iri the Direct Edge ECiV order book-l3 for inclusion in There is and will be redundant network connectivity between the Direct Edge ECN and any SRO trading facility and/or SRO display-only facility to which the Direct Edge ECN is linked. Connectivity is and will be continuously and systematically monitored. In the event both the primary and redundant Direct Edge ECN connectivity to any SRO trading facility andlor SRO display-only facility is interrupted and such interruption affects the ability of Direct Edge ECN to display quotes, the Direct Edge ECN administrator will immediately notify all SRO trading facilities and/or SRO display-only facilities to which Direct Edge ECN is linked and will cancel Direct Edge ECN's quotes from the affected SRO trading facility and/or SRO display-only facility. In addition, Direct Edge LLC will immediately send a broadcast email to all Direct Edge ECN subscribers advising them of the nature of the interruption; if the interruption impacts the ability of Direct Edge ECN to display or execute orders, subscribers will be advised to seek alternate executiorddisplay destinations until service can be restored. 17 CFR 242.600@)(72) 'O 17 CFR 242.600(b)(71) *' Subscribers choose an available display venue, i.e., an SRO trading facility or an SRO display-only facility, at the time of order entry. l2 Order types that are not displayed by definition in the Direct Edge ECN order book are not included in the determination of "top of book" for a security in the Direct Edge ECN. Accordingly, exchange market makers and OTC market makers that determine they have display obligations pursuant to the Quote Rule or the Limit Order Display Rule with respect to a particular order must not enter such order as an order type that is not displayed by the Direct Edge ECN. For example, if an OTC market maker has a display obligation with respect to a specific order, the OTC market maker should not enter the order type "non￾displayable book" as these orders are not displayed in either the Direct Edge ECN order book or in the "top of book" on any SRO trading facility or SRO display-only facility.

the cluotation data made available by such SRO trading ijcilities andor SRO display-only facilities to vendors pursuant to the Quote RUI~'~~
3. i)it*ect Edge EC'N acccpts only ordcrs that can bc automatically cxccutcd
pursuant to their terms and will not post any "131a11ual quotations".'5
4. Non-subscriber broker-dealers that have access to an SRO trading facility
and/or SRO display-only facility are able to: (i) view the "top of the book" quotes of the Direct Edge ECN displayed through such SRO trading facility or SRO display-only facility; and (ii) effect a transaction against the quotes contained in: (a) an SRO trading facility montage, via such SRO trading facility's platform; or (b) an SRO display-only facility, either via an SRO trading facility's platform (assuming any quote entered in an SRO display￾only facility is also displayed in the SRO trading facility), or through a private linkage system between such non-subscriber broker-dealer and the Direct Edge ECN. Direct Edge LLC will provide to such non-subscriber broker-dealers: (A) for Direct Edge ECN quotes displayed on an SRO trading facility, access to such quotes that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility, or (B) for Direct Edge ECN quotes displayed in an SRO display-only trading facility, 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, re~pectivel~.'~ l3 In determining the "top of book" for each display venue, Direct Edge LLC aggregates displayable orders received from all subscribers, including OTC market makers, exchange market makers and non-market maker orders. l4 17 CFR 242.602 Currently, Direct Edge ECN quotes contained in an SRO trading facility's montage are accessed through order delivery execution service functionality incorporated into the relevant SRO trading facility's platform. Direct Edge ECN quotes contained in an SRO display-only facility are currently accessed via a private linkage system either: (1) directly, via a leased line, e.g., 56K, T-1, or (2) indirectly, through a Direct Edge ECN broker-dealer subscriber or third party service bureau. To that end, Direct Edge LLC has established relationships with third party service bureau(s) that enable such non-subscriber to access the Direct Edge ECN quote. In addition, a participant in an SRO trading facility or SRO

5. Direct Edge LLC responds to orders entered into the Uii*ect fidge EC&
   through acccss to an SRO trading Cacility, or through a private linkage system to thc Direct Edge ECN for quotes displayed in an SRO display-only fdcility, 120 slower than LJiuect Edge ECN responds to olrie~s entered directly by subscribers illto the Direct Edge ECATbook."
6. Direct Edge LLC charges non-subscriber broker-dealers a rate no more than
   tl~efee Direct Edge LLC clrargt-s a substantial pol-tion of its active brolter￾dealer subscribers, plus any fee charged to Direct Edge LLC by an SliO trading i'acility or SRO display-only facility. Direct Edge LLC will comply with the applicable fee limitations for non-subscriber broker-dealers pursuant to Regulation NMS.
7. Dircct Edge EClV has sufficient capacity to handle the volurlle of data
   reasonably a~tticipated to be conducted in Direct Edge EC:IV. Direct Edge LLC conducts periodic reviews and testing "to: (i) cnsurc future capacity; (ii) identify potential weaknesses; a11d (iii) reduce the risks of system failures and tltreats to s ystem integrity. Based on the foregoing, Direct Edge LLC hereby respectfully requests that the Division extend the no action position contained in its No Action Letter. display-only facility may access the quotes in an SRO trading facility or SRO display-only facility directly by telephone to Direct Edge LLC. l7 An order dclivcrcd automatically by a12 SRO tradillg facility to tlic l3irec.f Edge ECN on behalf of a bloiie~dealer that wishes to access the Direect Edge ECN cjuote displayed on such SRO trading facility's montage via the SRO trading facility, or an order delivered via a private linl;age system from a broker-dealer that urishes to acccss a quotc frozn Direcl Edge ECN displayed in an SRO display-only Fdcility, electronically enters the Direct E4pe ECN order book as a "subscriber order" aitd is treated pari passu by the Direct Edge ECN with orders received in the same security kern other Direcat Edge RCN subscribers, i.e., by priccitime priority.

Please do not hesitate to contact me at the phone number listed above if you have any questions or comments regarding this matter. Very truly yours, Karen P. Mohr Director and Associate General Counsel cc: William Karsh Ronald Pasternak Rorneo Bermudez