SEC Division of Trading and Markets no-action letter: OnTrade, Inc.

June 28, 2006

C. Thomas Richardson Member of the Board of Directors OnTrade, Inc. 390 Greenwich Street New York, NY 10013

Re: OnTrade 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 OnTrade ECN ("System"), owned and operated by OnTrade, Inc. ("OnTrade"), 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 January 2006 no-action letter. 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) 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 NMS stocks.

(ii) OnTrade will maintain a linkage with at least one SRO trading facility 9 or SRO display-only facility 10 and: (a) transmit to such SRO trading facility or SRO display-only facility for display either the best priced orders of those orders entered by OTC market makers and exchange market makers for those securities in which they make markets (or act as specialists) or the best priced orders entered by all ECN subscribers; and (b) provide, to any broker or dealer, access to such orders that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility or, for orders displayed in an SRO display-only 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.

(iii) OnTrade responds, and intends to continue to respond, to orders by non-subscribers as promptly as it responds to orders by subscribers. Non-subscribers will be able to automatically execute against quotations displayed by the System.

(iv) OnTrade will charge non-subscriber broker-dealers a rate that does not exceed the then-current rate charged to a substantial portion of its active broker-dealer subscribers, and in any event, no more than the maximum fee permitted by Rule 610 of Regulation NMS. 11

(v) The System has sufficient capacity to handle the volume of trading reasonably anticipated to be conducted in the System. In addition, OnTrade will conduct regular periodic System capacity reviews and tests 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 OnTrade maintaining active connectivity with one or more SRO trading facilities or SRO display-only facilities. In the event that OnTrade loses connectivity with any SRO trading facility or SRO display-only facility, OnTrade, 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. OnTrade represents that it continuously and systematically monitors its connections to SRO trading facilities and/or SRO display-only facilities. OnTrade further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, OnTrade 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 OnTrade 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, OnTrade - 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 12 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 OnTrade, Inc. is a broker-dealer registered with the Commission, a direct, wholly-owned subsidiary of Citigroup Financial Products Inc., and an indirect, wholly-owned subsidiary of Citigroup, Inc.

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, Deputy Director, Division of Market Regulation, Commission, to C. Thomas Richardson, Member of the Board of Directors, OnTrade, dated January 11, 2006.

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

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

8 17 CFR 242.604.

9 See 17 CFR 242.600(b)(72)

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

11 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).

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

Incoming Letter:

The Incoming Letter is in Acrobat format.

---

Global Capltel Markmtr
390 Grccnwish Srrccr. 3rd Float
Ncw York. NY 1D013 corporate and investment banking June 28,2006 Mr. Robert L.D. Colby Acting Director Division of Market Regulation U.S. Securities and Exchange Commission 100 F Sbeet, N.E. Washington, D.C. 20549 Dear Mr. Colby:
OnTrade, Inc. ("OnTrade") is currently registered as a broker-dealer with the U.S. Securities and Exchange Commission (the "Commission"), and owns and operates the electronic communications network ("ECN") known as the "OnTrade ECN" (the "Trading System"), which also operates as an altemativc trading system pursuant to Regulation ATS of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Commission's Division of Market Regulation (the "Division") has previously takcn the position that the Tradi~g System is an ECN as defined in Rule 600@)(23) of Regulation NMS. The Division stated that OnTrade would be in compliance with the requirements applicable to the ECN Display Alternative with respect to NMS stocks for which a linkage between the Trading System and a registered national securities exchange or national securities association (an "SRO") or the NASD Alternative Display Facility (the "ADF")is operational, and the Trading System provides access to certain orders pursuant to the terms of the ECN Display Alternative. The Division also stated that it would not recommend that the Commission take enforcement action under the ECN ~rnendment' or the Limit Order Display h1e2against any OTC market maker or exchange market maker for enky into the Trading System 0%:(i) orders without modifying their public quotations in compliance wirh 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 January 11,2006; such no action position is due to expire on June 28,2006. I Formerly, 17 CFR240.11Acl-1. See Securities Exchange Act Release No. 37619A (Sept. 6. 1996), 61 Flk 48290. The Quote Rule has bccnredesignaled as Rule 602 of ReylationNMS under the Securiues and Exchange Acr, as amended, 17 CFR 242.602 ("Regulation NMS"). See Securities Exchange Act Rclcasc No. 51808 (June 9, ZOOS), 70 FR 37496 (June 29,2005). RegulationNMS became effective as of August 29, 2005. In addition, the definition of "electronics communicarions network" is now contained in Rule 600(b)(23) of Reegulation NMS. Formerly 17 CFR 240.1 1Acl4, now redesignated as Rulc 604 oIRegulationNMS, 17 CFR 242.604. which is known a4 the Limit Order Display Rule. Cirigroup Globnl M~rlretrInc

OnTrade operates the Trading System as an ECN in NMS stocks, as such term is defined in Rule 600(b)(47) of Regulation NMS, pursuant to the rules of one or more SROs. Therefore, OnTrade respectfully requests that the Division advise OnTrade that:

1. The Trading System will be an ECN as that term is defined in Rule 600@)(23) of'
   Regulation NMS.~
2. OnTrade would be in compliance with the requirements applicable to the ECN
   Display Alternative, as described in paragraph @)(5)(ii) of Rule 602 of Regulation NMS (''Quote ~ule")~with respect to any NMS stock for which a linkage between the Trading System and an SRO trading facility or SRO display-only facility is operational.
3. The Division would not recommend that the Commission take enforcement action
   against any OTC market makers or exchange market makers who are participants in the Trading System, if those rnwket makers enter orders into the Trading System without modifjing their public quotations in compliance with the Quote Rule and the Limit Order Display Rule, as applicable. General Description of the Trading System OnTrade operates the Trading System as an electronic brokerage service which combines dynamically updated equity securities marker information with customer order enQ, negotiation and execution capabilities. Customers are able to electronically enter orders directly into the Trading System by means of a dedicated line that connects the customers to the Trading System database. Such orders are then broadcast: instantaneously to other customers. and are able to interact with orders entered bv . anv of such other customers. < All such activity is conducted anonymously, on a real-time basis, through the Trading

System. Customers include various classes of market participants, including institutions,

&ket makers, exchange specialists, and non-market making broker-dealers.

Participants include at least one registered Nasdaq Market Maker. The Trading System,

howevm, provides an opportunity for all participants (not merely Nasdaq Market Makers)

to obtain execution of their orders.

Request for No-Action Relief
In connection with its request for no-action relief, OnTrade makes the following representations with respect to any NMS stock in which it seeks to operate as an ECN and satisfy the requirements of the ECN Display Alternative pursuant to the rules WE an SRO:

1. The Trading System is an "ECN" within the meaning of Rule 600@)(23) of
   Regulation NMS and allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in NMS stocks. 17 CFR 242.600@)(23). 4 Please see footnote 1 for a definition of the Quote Rule.

2. OnTrade will maintain a linkage with at least one SRO trading facility or SRO
   display-only facility5 and: (a) transmit to such SROtrading facility or SRO display-only facility for display either the best priced orders of those orders entered by OTC market makers and exchange market makers for those securities in which they mnke markets (or act as specialists) or the best priced orders entered by all ECN subscribers; and @) provide, to any broker or dealer, access to such orders that is functionally equivalent to the access that is generally available for quotes displayed by an SRO trading facility or, for orders displayed in an SRO display-only facilify, 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.6

3. OnTrade responds and intends to continue to respond to orders by non-subscribers
   as promptly as it responds to orders by subscriber^.^ Non-subscribers will. be able to automatically execute against quotations displayed by the Trading System.

4. OnTrade will charge non-subscriber broker-dealers a rate that does not exceed the
   then-current rate charged to a substantial portion of its active broker-dealer subscribers, and in any event, no mote than the maximum fee permitted by Rule 610 of Regulation NMS.

5. The Trading System ha$ sufficient capacity to handle the volume of trading
   reasonably anticipated to be conducted in the Trading System. In addition, OnTride will conduct regular periodic Trading System capacity reviews and tests to (a) ensure future capacity, @) identify potential weaknesses, and (c) reduce the risks of system failures and threats to system integrity.

6. OnTrade has and will maintain procedures to ensure that only certain designated
   personnel have access to the Trading Systm. Those designated personnel will keep confidential all trading information entered into the Trading System, and will not use such information for trading in OnTrade's or any affiliate's proprietary account, its customers' accounts, or their own personal trading accounts. In addition, the operation of the Trading System will be kept separate f?om other business of OnTrade.

7. OnTrade continuously and systematically monitors its connections to SRO trading
   facilities andor SRO display-only facilities. If the Trading System loses connectivity with any SRO trading facility or SROdisplay-only facility, OnTradepersonnel will "he Trading System currently maintains a linkage with Nasdaq and with the ADF. All brokcr-dealers are able ro view the "top of the book" quote of the Trading System displayed through he SRO trading facility by either going directly through the SRO wading facility (Nasdaq) or through a reputable third party with whom the Trading System has a direct connection. Both subscribers and non￾subscribersare able to access the quotes at he rop of he book in ADF either through a direct connection with the Trading System or through a reputable third party with whom the Trading System has a direct connection. Non-subscribers to the Trading Sysrem are also able to electronically enter ordcrs imo the Trading System, and automatically execute against quotations displayed by the Trading System by use of r~putable third-party systems. ' OnTrade monitors tbe execution speed of all orders on a monthly basis to ensure that non-subscriber orders are executed no slower thansubscriber orders.

iininediately cancel all quotes previously published by the Trading System in that facility and notify its subscribers to advise them of such intamption. Conclusion Based upon the foregoing, we request that the Division confirm that OnTrado operaws the Trading System as an ECN in compliancewith the requirements applicable to the ECN Display Alternative with respect to any NMS stock for which OrrTrade will publish its best-priced buy and sell orders to an SRO and will provide access to such orders pursuant to the rules of that SRO. We also seek the Division's representation that it would not recommend enforcement action against the OTC market makers and exchange market makers who are subscribers for entry of orders in the Trading System without modifying their public quotations in complimce with thc ECN Amendment. If you have any questions or would like any additional information regarding this request, please contact the undersigned at (212) 723-4921, or Michael J. Masone, Counsel, ar (212) 723-5875. very truly yours,
C. Thomas Richardson
Mcmber of the Board of Directors
OnTrade, Inc.