Bloomberg Tradebook is owned by Bloomberg L.P. and is located in New York City.  Bloomberg L.P. provides multimedia, analytical and news services to more than 170,000 terminals used by 350,000 financial professionals in 100 countries worldwide.  Bloomberg tracks more than 135,000 equity securities in 85 countries, more than 50,000 companies trading on 82 exchanges and more than 406,000 corporate bonds.  Bloomberg News is syndicated in over 350 newspapers, and on 550 radio and television stations worldwide.  Bloomberg publishes seven magazines, as well as books on financial subjects for the investment professional and non-professional reader. 

Bloomberg Tradebook is an electronic agency broker serving institutions and other broker-dealers.  We count among our clients many of the nation's largest institutional investors REPRESENTING-THROUGH PENSION FUNDS, MUTUAL FUND AND OTHER VEHICLES-THE SAVINGS OF MILLIONS OF ORDINARY AMERICANS. Bloomberg Tradebook specializes in providing innovative tools that MAKE LARGE ORDERS SMALL AND ELIMINATE THE TRADITIONAL BARRIER BETWEEN THE UPSTAIRS MARKET AND THE TRADING FLOOR.  WE BRING UPSTAIRS LIQUIDITY DIRECTLY INTO CONTACT WITH SMALL RETAIL TRADING, THE OPTIONS MARKET-MAKERS AND PROGRAM TRADING FLOW AND IN THE PROCESS WE CONSOLIDATE WHAT HAS BEEN A FRAGMENTED MARKET.  Our clients have rewarded our creativity and our service by trusting us with their business, allowing us to regularly TRADE MORE THAN 150 million shares a day. 

What are ECNs?  ELECTRONIC COMMUNICATIONS NETWORKS-ECNS-ARE ELECTRONIC SYSTEMS THAT FACILITATE TRADING IN SECURITIES.  market structure decisions-SPECIFICALLY THE SEC'S 1996 ISSUANCE OF THE ORDER HANDLING RULES-HAVE PERMITTED ECNS TO FLOURISH OVER THE PAST SIX YEARS, BENEFITING CONSUMERS AND THE MARKETS GENERALLY.  These rules-aimed primarily at exchange specialists and Over-the-Counter market makers-were designed to promotE market transparency IN THE NASDAQ MARKET.  IN THE WORDS OF THEN SEC CHAIRMAN ARTHUR LEVITT:

ELECTRONIC COMMUNICATION NETWORKS HAVE BEEN ONE OF THE MOST IMPORTANT DEVELOPMENTS IN OUR MARKETS IN YEARS-PERHAPS DECADES. BUT EXACTLY WHAT ARE ECNS, AND WHAT ARE WE TO MAKE OF THEIR IMPACT ON OUR MARKETS?  IN SIMPLEST TERMS, ECNS BRING BUYERS AND SELLERS TOGETHER FOR ELECTRONIC EXECUTION OF TRADES.  THEY HAVE PROVIDED INVESTORS WITH GREATER CHOICES, AND HAVE DRIVEN EXECUTION COSTS DOWN TO A FRACTION OF A PENNY.  AS A RESULT, THESE NETWORKS PRESENT SERIOUS COMPETITIVE CHALLENGES TO THE ESTABLISHED MARKET CENTERS.  MORE FUNDAMENTALLY, THEY ILLUSTRATE THE BREATH-TAKING PACE OF CHANGE THAT RESULTS WHEN TECHNOLOGY AND COMPETITION COALESCE.[1] 

As has often been observed, sunlight is the best disinfectant.  indeed, the increased transparency promoted by the SEC's Order Handling Rules and the subsequent integration of ECNs into the national quotation montage narrowed Nasdaq spreads by nearly 30% in THE FIRST year FOLLOWING ADOPTION OF THE ORDER HANDLING RULES.  tHESE, AND SUBSEQUENT REDUCTIONS IN TRANSACTIONAL COSTS, CONSTITUTE SIGNIFICANT SAVINGS THAT ARE NOW AVAILABLE FOR INVESTMENT THAT FUELS BUSINESS EXPANSION AND JOB CREATION. 

While the complete list of reforms ordered by the SEC to promote transparency is long and varied, all of these changes, including the promulgation of the Order Handling Rules, were animated by the same underlying principle-namely that sunlight-INCREASED TRANSPARENCY-produces the most honest and efficient markets. 

ECNs-A Market Solution to a Market Problem.  A regulatory regime that encourages transparency was a necessary, but not sufficient, precondition to the growth of ECNs.  The reason ECNs HAVE LONG accountED for NEARLY HALF of the reported share volume of Nasdaq is simple-ECNs are a market solution to a market problem. 

NOT ALL ECNS ARE ALIKE.  AGENCY ECNS SUCH AS BLOOMBERG TRADEBOOK, HOWEVER, SHARE four characteristics-neutrality, transparency, fairness and innovation. 

Neutrality?  BLOOMBERG TRADEBOOK IS AN agency broker.  WE take no position for our own account.  Thus we are neutral in the marketplace and exist only to serve our customers' need to buy or sell shares.  IN ADDITION, WE ARE AN OPEN-ARCHITECTURE ECN, BY WHICH WE MEAN THAT WE DO NOT SIMPLY INTERNALIZE OUR PARTICIPANTS' ORDERS.  iNSTEAD, WE ROUTE MOST OF THE ORDERS WE RECEIVE TO MARKET MAKERS AND OTHER ECNS FOR EXECUTION-GIVING OUR PARTICIPANTS THE OPTION TO SELECT WHATEVER PRICES ARE AVAILABLE IN THE MARKETS.  IN THAT WAY, WE DIFFER FROM ECNS SUCH AS ISLAND, A CLOSED-ARCHITECTURE SYSTEM, WHICH DOES NOT ROUTE ORDERS TO OTHER MARKET CENTERS. 

Transparency?  Like market makers, we maintain an electronic book of our customers' bids and offers.  But unlike market makers we publish our entire book of quoted prices electronically for all our customers to see.  Indeed, AS NOTED ABOVE, we take advantage of this transparency to ALLOW our customers to ROUTE THEIR ORDERS TO the best available priceS, even IF THEY ARE outside of Bloomberg Tradebook. 

Fairness?  ECNs are required by SEC rules to respond immediately-and I mean immediately-to orders AT ANY GIVEN PRICE, in the TIME SEQUENCE they are received, whether they come from our best customers or from our competitors.  That's probably the highest standard of fairness in the industry. 

Innovation?  UNLIKE NASDAQ AND THE NYSE, ECNS DO NOT ENJOY THE PRIVILEGED AND PROTECTED STATUS OF A GOVERNMENT-SPONSORED MONOPOLY.  INSTEAD, ECNs MUST EARN THEIR KEEP BY innovatING.  at its inception in 1996, For example, Bloomberg Tradebook introduced the concept of ELECTRONIC ORDER SIZING to the U.S.  equity markets.  ELECTRONIC ORDER SIZING is a BLOOMBERG FUNCTIONALITY that PERMITS INVESTORS TO DIVIDE LARGE ORDERS AUTOMATICALLY INTO SMALL, RANDOM-SIZED PIECES BEFORE BEING PRESENTED TO THE MARKET.  With ELECTRONIC ORDER SIZING, ECNS HAVE GIVEN INVESTORS THE TOOLS TO CONTROL THE MARKET IMPACT OF THEIR TRANSACTIONS, REDUCING THE EXTENT TO WHICH THE MARKET "MOVES AWAY" FROM THEM WHILE THEY ARE BUYING OR SELLING IN SIGNIFICANT QUANTITIES. 

jUST AS THE COMPETITION FROM ECNS HAS REDUCED EXPLICIT TRANSACTIONAL COSTS-COMMISSIONS AND SPREADS-INNOVATIONS LIKE RESERVE, DISCRETION, ELECTRONIC ORDER SIZING AND OTHER ORDER HANDLING TOOLS HAVE BROKEN DOWN THE BARRIER BETWEEN THE UPSTAIRS MARKET AND THE TRADING FLOOR, INCREASING LIQUIDITY AND LEADING TO DRAMATIC DECREASES IN THE IMPLICIT COSTS OF TRANSACTING IN THE PUBLIC MARKETS FOR NASDAQ SECURITIES. 

Any edge we gain FROM INTRODUCING AN INNOVATION is a momentary one.  TO REMAIN COMPETITIVE, we MUST continue to innovate.  We have done so continuously OVER the past SIX years. 

Along with neutrality, transparency, fairness and innovation, add lots of enthusiasm and creativity from people passionately devoted to serving their customers and you have a picture of who we are and why we exist. 

When the Senate Banking Committee held a hearing in the last Congress exploring the role of ECNs, Frank Zarb, then‑Chairman of the National Association of Securities Dealers, stated, "I guess I sum up the answer as to why we have ECNs as the fact that the national stock exchanges, and I'm not only talking about ours, but the exchanges around the world haven't been keeping pace with the needs of the market." 

Mr. Zarb is a RECOGNIZed leader in business and public service.  Investors are fortunate to have had the benefit of his leadership, but I respectfully submit that the reason ECNs exist is not only because of what national stock exchanges failed to do, but also because of what we innovating broker-dealers have done, in the heat of competition.  Mr.  Chairman, it's worth pondering why the stock exchanges didn't keep pace, as Mr. Zarb stated. 

We would submit that NASDAQ AND THE OTHER EXCHANGES, BECAUSE THEY ARE government-sponsored monopolIES, ultimately cannot provide the innovative ideas and customer service of the best ECNs AND OTHER PRIVATE MARKET PARTICIPANTS.  To spur future innovation, I'd rather place my faith in NASD's members-the marketplace of competing broker-dealers. 

The Current Challenge.  At present, most SROs are non‑profit organizations.  NASD, however, has largely completed its privatization of Nasdaq and it may well be that other privatizations will follow.  HISTORICALLY, Under the cover of a non‑transparent bureaucracy, non-profit SROs have exploited the opportunity to subsidize their other costs (FOR EXAMPLE, costs of market operation, market regulation, market surveillance, member regulation) through market information fees.  For all SROs, the incentive will be strong to CONTINUE TO exploit this government-sponsored monopoly over market data by charging excessive rates for market data and BY using thE RESULTING monopoly rents to subsidize their competitive businesses.  Indeed, shareholders of the now-for-profit eXCHANGES will effectively demand that market data charges remain excessive. 

Along with its market data monopoly, Nasdaq also will have a powerful incentive to leverage its trade execution monopoly to the detriment of consumers, investors and the markets.  Currently, there is no real alternative to Nasdaq's monopoly with respect to the execution of market-maker quotations/orders in securities traded via Nasdaq.  Through a series of developments, starting with the inauguration of the Small Order Execution System ("SOES") in the 1980's and progressing through the development of SuperSOES and SuperMontage, Nasdaq has evolved from a decentralized, quotation- and telephone-based system into a screen-based, electronic communications network embodying a CENTRAL, electronic limit order book. 

In theory, NASD members can bypass SuperSOES through private wire connections between a market maker and a customer or dealer.  In reality, however, that means of avoiding SuperSOES is not on an equal competitive footing with the use of SuperSOES.  Orders transmitted through SuperSOES impose obligations on the market maker to execute against its published quotation. 

Only Nasdaq has the monopolistic power to DELIVER MANDATORY EXECUTIONS TO MARKET MAKERS AGAINST THEIR QUOTATIONS.  Individual market participants do not have the market power to replicate that obligation through private contractual arrangements or other private ordering. 

sUPERMONTAGE AND THE NASDAQ EXCHANGE APPLICATION.  THE RESOLUTION OF QUESTIONS REGARDING THE NASDAQ EXCHANGE APPLICATION AND THE MANNER IN WHICH SUPERMONTAGE IS PHASED IN WILL GO A LONG WAY TOWARD DETERMINING WHETHER THE SECURITIES MARKETS OF THE FUTURE WILL BE SHAPED BY COMPETITION OR DOMINATED BY GOVERNMENT-SPONSORED MONOPOLIES.  that WILL HAVE MUCH TO DO WITH WHETHER OUR MARKETS REMAIN COMPETITIVE, ROBUST AND OPEN TO INNOVATION. 

NASDAQ HAS APPLIED TO THE SEC TO BECOME A FOR-PROFIT EXCHANGE.  UNFORTUNATELY, NASDAQ WOULD LIKE NOT ONLY TO MAINTAIN, BUT ALSO TO EXPAND, ITS GOVERNMENT-SPONSORED MONOPOLY POWERS WHILE BECOMING A FOR-PROFIT EXCHANGE.  TO THAT END, NASDAQ PETITIONED THE SEC IN 1999, TO EXPAND ITS MONOPOLY BY CENTRALIZING QUOTATION DISPLAY AND ORDER EXECUTION IN A "SUPERmONTAGE" NASDAQ WOULD CONTROL. 

RECOGNIZING THE POTENTIAL ANTICOMPETITIVE IMPACT OF sUPERmoNTAGE, THE SEC MADE ITS JANUARY 2001 APPROVAL OF SUPERMONTAGE CONTINGENT ON NASD'S MEETING CERTAIN CRITICAL PRECONDITIONS WHICH WERE INTENDED TO ENSURE THAT PARTICPATION IN SUPERMONTAGE WAS truly VOLUNTARY. 

ALTERNATIVE DISPLAY FACILITY.  PREEMINENT AMONG THESE PRECONDITIONS WAS THE ESTABLISHMENT OF AN "ALTERNATIVE DISPLAY FACILITY" (ADF)-A DISPLAY FACILITY THAT WOULD BE RUN BY NASD AND STAND AS AN ALTERNATIVE TO NASDAQ. 

THE ADF WAS DEEMED SO CRITICAL TO THE SEC THAT IT WAS CITED AS A PRECONDITION TO BOTH THE ROLLOUT OF SUPERMONTAGE AND THE POSSIBLE APPROVAL OF THE NASDAQ EXCHANGE APPLICATION. 

NASD IS NOT INDEPENDENT OF NASDAQ.  UNFORTUNATELY, A NUMBER OF OBSTACLES HAVE BEEN PLACED IN THE WAY OF CREATING A COMMERICIALLY VIABLE ADF, SOME FLOWING FROM THE FACT THAT NASD-WHICH IS CHARGED WITH ORGANIZING AND RUNNING THE ADF-IS NOT INDEPENDENT OF nASDAQ. 

NASD AND NASDAQ HAVE INTERLOCKING BOARDS.  NASD RETAINS A SIGNIFICANT OWNERSHIP INTEREST IN NASDAQ AND A COMMERCIAL INTEREST IN NASDAQ'S EVENTUAL SUCCESS AS A FOR-PROFIT EXCHANGE.  THE SIGNIFICANCE OF NASD'S NOT BEING INDEPENDENT OF NASDAQ IS DRIVEN HOME IN NASDAQ'S aMENDMENT 2 TO ITS FORM 10 REGISTRATION STATEMENT. dISCUSSING THE ADF AND ITS COMPETITIVE POTENTIAL, NASDAQ STATES:

IF THIS MARKET BECOMES A VIABLE ALTERNATIVE TO NASDAQ, THEN NASDAQ FACES THE RISK OF REDUCED MARKET SHARE IN TRANSACTIONS AND MARKET INFORMATION SERVICES REVENUES, which WOULD ADVERSELY AFFECT NASDAQ'S BUSINESS, FINANCIAL CONDITION, AND OPERATING RESULTS.

wITH NASDAQ VIEWING THE ADF AS A POTENTIAL THREAT, WE BELIEVE THE SEC AND CONGRESS NEED TO REMAIN VIGILANT TO ENSURE THAT NASD IS WHOLEHEARTEDLY COMMITTED TO THE ADF.

 COMMENDING THE SEC.  SIGNFICANTLY, AS NASD AND NASDAQ INITIALLY DESIGNED IT, THE ADF WAS TO BE A HIDDEN MARKET-IN ESSENCE A "DISPLAY" FACILITY THAT FEW MARKET PARTICIPANTS COULD SEE.  MARKET PARTICIPANTS COULD HAVE CHOSEN TO display THEIR QUOTATIONS ON THE ADF, BUT NO PROVISION HAD BEEN MADE FOR THE MARKET AT LARGE TO SEE THOSE QUOTATIONS.  AS PROPOSED BY NASD AND NASDAQ, THE TRANSPARENCY THAT HAS BEEN THE HALLMARK OF REGULATION SINCE THE PROMULGATION OF THE ORDER HANDLING RULES WOULD HAVE BEEN VITIATED FOR THE ADF, TO THE DETRIMENT OF CONSUMERS AND MARKETS.  tHIS SUMMER, THE sec REJECTED NASDAQ'S CALL FOR A HIDDEN MARKET AND ISSUED INTERPRETIVE GUIDANCE THAT WILL GO A LONG WAY TOWARD ENSURING THAT ADF QUOTATIONS WILL BE SEEN IN A MEANINGFUL WAY. 

LIKEWISE, WHILE nASDAQ HAD ARGUED THAT A VIABLE ADF IS NOT ESSENTIAL, the SEC MADE CLEAR THAT A VIABLE ADF IS ESSENTIAL TO CURTAIL THE POTENTIAL ANTICOMPETTIVE IMPACT OF SUPERMONTAGE.  NASD HOBBLED THE LAUNCH OF THE ADF BY NOT RELEASING THE FINAL TECHNICAL SPECIFICATIONS NECESSARY FOR PARTICIPATION IN THE adf UNTIL aUGUST 2002, PLACING ecnS AND OTHER POTENTIAL adf PARTICIPANTS IN A DIFFICULT AND DISADVANTAGED POSITION.  THE seC THIS SUMMER, SEEKING TO MITIGATE THE MORE DAMAGING EFFECTS OF AN adF THAT WOULD LAUNCH TOO LATE TO BE AN EFFECTIVE ALTERNATIVE TO SUPERMONTAGE, TOOK THE important STEP OF ENSURING THAT THE ADF AND SUPERMONTAGE "ROLLOUT" SIMULTANEOUSLY, A PROCESS THAT IS COMMENCING THIS WEEK.

 WE WOULD ALSO COMMEND THE SEC FOR RECOGNIZING THAT MAJOR SUPERMONTAGE/ADF ISSUES-EXPRESSLY INCLUDING DISCRIMINATORY AND ANTICOMPETITIVE FEES-WILL REQUIRE ONGOING SEC ENGAGEMENT. 

DISCRIMINATORY anD ANTICOMPETITIVE PRACTICES.  PRACTICES THAT ARE DISCRIMINATORY AND ANTICOMPETItiVE STAND AS GOOD EXAMPLES OF THE KINDS OF ISSUES THAT MERIT BOTH SEC AND CONGRESSIONAL ATTENTION.  IN PARTICULAR, I WANT TO CALL YOUR ATTENTION TO QUOTE DECREMENTATION AND DISCRIMINATORY FEES. 

QUOTE DECREMENTATION HAS TO DO WITH HOW ORDERS ARE DISPLAYED AND ADJUSTED ON SUPERMONTAGE TO THE DISADVANTAGE OF ECNS AND THEIR CUSTOMERS.  UNDER SUPERMONTAGE RULES, IF AN ECN POSTS A QUOTATION FOR A CERTAIN PRICE AND QUANTITY IN A GIVEN SECURITY, IT WILL BE PENALIZED FOR DECLINING AN ORDER FROM A COUNTERPARTY WITH WHOM THE ECN CHOOSES NOT TO DO BUSINESS.  SUCH A COUNTERPARTY MAY BE AN ENTITY THAT IS AN UNACCEPTABLE CREDIT RISK, BUT IT IS MOST LIKELY TO BE ONE THAT REFUSES TO PAY AN ECN'S ACCESS FEES.   

UNDER THE SUPERMONTAGE RULES, WHEN AN ECN DECLINES AN ORDER, EVEN IF ONLY FOR PART OF THE QUANTITY DISPLAYED IN ITS QUOTATION, THE ECN'S ENTIRE QUOTATION WILL BE REMOVED FROM THE SUPERMONTAGE QUOTATION DISPLAY.  AS A RESULT, THE ECN'S CUSTOMERS WILL LOSE THEIR PLACE IN THE SUPERMONTAGE TIME-PRICE QUEUE.  IN ADDITION, ECNS WILL BE AT INCREASED RISK FOR INCURRING COSTS INSTEAD OF REVENUE.  wHAT IS TELLING ABOUT THE QUOTE DECREMENTATION FEATURE OF SUPERMONTAGE IS THAT ITS ADVERSE EFFECTS FALL EXCLUSIVELY UPON ECNS.  IT IS GROSSLY DISCRIMINATORY. 

sUPERMONTAGE FEES DIFFERENTIATE BETWEEN ORDER TYPES IN A WAY THAT IS BOTH UNFAIR AND DISCRIMINATORY.  iN NASDAQ'S NOMENCLATURE, A "PREFERENCED ORDER" IS AN ORDER SENT TO A SPECIFIC MARKET PARTICIPANT THAT HAS A QUOTATION DISPLAYED IN SUPERMONTAGE AT THE BEST BID OR OFFER.  A PREFERENCED ORDER IS EXECUTED THROUGH THE USE OF THE SUPERMONTAGE EXECUTION ALGORITHM.  A "DIRECTED ORDER" IS AN ORDER SENT TO A SPECIFIC ECN THAT HAS ELECTED TO RECEIVE ORDERS RATHER THAN EXECUTIONS. 

NASDAQ PROPOSES TO IMPOSE A PENALTY OF 150% ON ORDERS DIRECTED TO ECNS OR OTHER PARTICIPANTS THAT ARE PERMITTED TO ACCEPT ORDER DELIVERY RATHER THAN AUTOMATIC EXECUTIONS.  BY CHARGING 150% MORE FOR dIRECTED ORDERS THAN FOR ORDERS EXECUTED USING THE SUPERMONTAGE ALGORITHM, THE FEE STRUCTURE PENALIZES ECNS AND OTHER MARKET PARTICIPANTS THAT WISH TO USE THEIR OWN TRADING ALGORITHMS TO ACCESS LIQUIDITY ON THE SUPERMONTAGE SCREEN VIA DIRECTED ORDERS.  tHESE DELIBERATELY DISCRIMINATORY FEES WOULD FORCE ORDERS INTO SUPERMONTAGE'S EXECUTION ALGORITHM, THEREBY RESTRICTING MARKET PARTICIPANTS FROM HAVING EQUAL ACCESS TO ALL AVENUES OF EXECUTION. 

eFFECTIVELY, THE PROPOSED FEES IMPOSE A PENALTY ON NASD MEMBERS THAT USE ALTERNATIVES TO SUPERMONTAGE.  BY INCREASING THE COST OF USING FACILITIES OTHER THAN SUPERMONTAGE, THE SUPERMONTAGE FEES COMPEL NASD MEMBERS TO KEEP THEIR TRADING VOLUME ON SUPERMONTAGE AND DISCOURAGE THEM FROM USING THE ADF OR OTHER ALTERNATIVES TO SUPERMONTAGE. 

OTHER ELEMENTS OF NASDAQ'S PROPOSED SUPERMONTAGE FEE SCHEDULE ALSO ARE INTENDED TO SUPPRESS COMPETITION.  NASDAQ HAS PROPOSED EXTENDING THE PRICING SCHEME IT CURRENTLY USES FOR sUPERSOES-ITS CURRENT ORDER EXECUTION SYSTEM-TO SUPERMONTAGE.  UNDER THE SUPERSOES PRICING SCHEME, NASD MEMBERS THAT REPORT TO NASDAQ AT LEAST 95% OF THEIR TRADES IN nASDAQ SECURITIES FOR THE PRECEDING MONTH ARE DEEMED "fULL CONTRIBUTION mEMBERS".  THOSE REPORTING FEWER THAN 95% OF THEIR TRADES IN NASDAQ SECURITIES FOR THE PRECEDING MONTH TO NASDAQ  ARE DEEMED "pARTIAL CONTRIBUTION MEMBERS".  FULL CONTRIBUTION MEMBERS WOULD PAY SUBSTANTIALLY LOWER NASDAQ ACCESS FEES THAN PARTIAL CONTRIBUTION MEMBERS.  IN SHORT, THE ACCESS FEE DIFFERENTIAL WOULD PUNISH NASD MEMBERS FOR DOING MORE THAN DE MINIMIS  BUSINESS ON THE ADF, OR ANY TRADING FACILITY OTHER THAN NASDAQ'S SUPERMONTAGE.  IT'S HARD TO IMAGINE AN ACTION MORE CONTRARY TO CONSUMERS' INTERESTs THAN EXTENDING SUCH AN ANTICOMPETITIVE PRICING STRUCTURE TO SUPERMONTAGE. 

As it is, Nasdaq has taken unto itself the enterprise value of its market system, which NASD'S MEMBERS developed over 30 years.  Nasdaq embodies both a quotation facility and an execution/clearance facility, which the ADF is not intended to provide.  It may be that the ADF will nevertheless be a preferred venue, but that will eventuate only if it is allowed to compete on an equal footing with Nasdaq.  Exclusionary and anticompetitive elements in the SuperMontage/SuperSOES combination should be revised to provide that equal footing. 

CENTRALIZATION VERSUS DE-CENTRALIZATION.  For-profit exchanges will have powerful incentives to leverage their existing government-sponsored monopolies to gain an unfair advantage in currently competitive markets.  They'll have incentives to "keep pace" with market innovators not by moving forward themselves, but by slowing down all market participants and centralizing order flow. 

If that occurs, consumers, investors and the markets themselves will be denied the benefits of competition.  Everyone loses if exchanges-comfortable as government-sponsored monopolies-fail to innovate, leaving American markets vulnerable to offshore competitORs. 

Technology makes possible a market structure that wouldn't previously have been possible.  That has spawned a debate over the past few years over whether public policy should favor a more decentralized market structure, or whether public policy should encourage centralization, as often advocated by the exchanges.   

This argument has manifested itself in a number of different ways.  A few years ago, proponents of centralization urged support for a time priority Central Limit Order Book (CLOB) to deal with the alleged "problem" of market fragmentation.  The notion behind the CLOB was that, by centralizing orders in one place, a single "black box", maximum order interaction and perhaps better prices might be achieved.   

While the CLOB was ultimately rejected AS UNWORKABLE AND UNWISE, the previously described interaction of SuperSOES and SuperMontage within Nasdaq represent the same effort to centralize.  The recent Nasdaq pricing proposal, which would clearly discourage execution of trades outside of NasdaQ-even if the best price for a stock were being offered outside of Nasdaq-is simply the latest manifestation of this urge towards centralization.  As exchanges contemplate BECOMING for-profit COMPANIES, this urge to centralize order flow and execution will grow more pronounced.  This emphasizes the need for a functional, fully competitive ADF as a means to mitigate the anticompetitive effects of Nasdaq's market scheme.  It may well be that additional remedial measures will be needed.  The continued vigilance of the Congress and the SEC will be essential as these developments unfold. 

As the growth of ECNs illustrates, modern technology allows the advantages of maximum order interaction without the downside of centralization.  State-of-the-art telecommunications systems like the Internet don't rely on a single monopoly channel-rather, they rely on networked webs of multiple competing and redundant linkages.  Why shouldN'T the securities markets WORK THE SAME WAY AND REAP THE SAME BENEFITS? 

centralized systems are resistant to change.  The innovations that ECNs have brought to the market would not have occurred under more centralized systems.  A centralized system also provides the significant downside of a central point of failure.   

NASDAQ AND THE NYSE ARGUE THAT THE ABSENCE OF CENTRALIZATION IS "FRAGMENTATION".  PROPERLY UNDERSTOOD, MARKET FRAGMENTATION IS THE FAILURE OF SUPPLY TO INTERACT WITH DEMAND AND VICE VERSA.  THE CURE FOR FRAGMENTATION IS A COMBINATION OF TRANSPARENCY AND INTERLINKAGE OF MULTIPLE MARKET VENUES AND LIQUIDITY POOLS, a combination THAT TAKES PLACE ON INVESTORS' DESK TOPS.  THE CURE FOR FRAGMENTATION NEED NOT INVOLVE A SINGLE, MONOPOLISTIC MARKET-INDEED NASDAQ PROPOSES TO TRADE NYSE STOCKS ON ITS EXCHANGE AND THAT COMPETITION IS BENEFICIAL.  TO IGNORE THESE BASIC REALITIES AND TO ARGUE THAT FRAGMENTATION SOMEHOW JUSTIFIES CENTRALIZING AND MONOPOLISTIC MARKET MODELS IS FUNDAMENTALLY MISLEADING.   

ECNs-Consumers and Investors Benefit.  So who has benefited from the existence of ECNs?  For one, small retail customers who, for the first time, have gained direct unfettered access to the liquidity of institutional order flow represented directly in the market.  tHROUGH ELECTRONIC ORDER SIZING, BLOOMBERG TRADEBOOK'S SYSTEM PERMITS DIRECT INTERACTION BETWEEN INSTITUTIONAL ORDERS AND RETAIL ORDERS SINCE THE INSTITUTION CAN CUT ITS ORDER INTO PIECES THAT WILL INTERACT EFFECTIVELY WITH THE MUCH SMALLER RETAIL ORDERS.  Institutional investors-WHICH POOL THE SAVINGS OF MANY, MANY SMALL INVESTORS-are able for the first time to find liquidity for their orders by interacting directly with small order floW, THEREBY CONSOLIDATING WHAT HAD BEEN A FRAGMENTED MARKET.  

WHO ELSE BENEFITS FROM ECNS? All investors who have seen the speed and fairness of their executions improve, as ECNs have raised the standard for all broker-dealers.  Even traders not participating in ECNs benefit from our depth, liquidity and immediacy each time they hit an ECN bid or take an ECN offer. 

Who Hasn't Benefited from ECNs?  Useful linkages have yet to be developed for the New York Stock Exchange listed market.  As a result, investors in that market have yet to reap the full benefits of the competition provided by ECNs.  While the SEC has allowed ECNs access to the Intermarket Trading System through Nasdaq, this is not sufficient.  tHE iNTERMARKET tRADING sYSTEM remains crippled both by its technological ineffectiveness and an unworkable governance structure that makes any movement nearly impossible.  THIS IS WHY IT IS IMPERATIVE THAT THE STEPS NECESSARY TO FACILITATE THE PROMISED DISPLAY OF NYSE LISTED STOCKS IN THE ADF BE UNDERTAKEN AS SOON AS POSSIBLE. 

Government-sponsored market centers like the Nasdaq Stock Market and the New York Stock Exchange can either make ECN transparency available to the entire national market system or reduce transparency by seeking to block ECN display linkages.  Clearly the NYSE has historically had no interest in encouraging linkages that would make ECNs players in the listed market.  IT IS LONG PAST TIME FOR THE BENEFITS ECNS HAVE BROUGHT TO THE MARKET IN OVER-THE-COUNTER SECURITIES TO BE EXTENDED TO MARKETS IN LISTED SECURITIES.           

Conclusion.  The neutrality, transparency, fairness and innovation ECNS collectively bring to the Nasdaq market have dramatically increased COMPETITION AND efficiency on Wall Street, redounding to the benefit of CONSUMERS ON Main Street and the economy.  Investors in the New York Stock Exchange listed market should be permitted an opportunity to enjoy the same benefits. 

Historically not-for-profit exchanges are contemplating a for-profit future.  As market players that have traditionally functioned as public utilities become for-profit entities, their goals, incentives and agendas radically change as well.  Consumers and investors will suffer if exchanges succeed in leveraging their existing government-sponsored monopolies into currently competitive arenas.  These efforts will SUPPRESS COMPETITION, DISCOURAGE INNOVATION AND HARM CONSUMERS.

[1]               Speech by SEC Chairman Arthur Levitt, Dynamic Markets, Timeless Principles, Columbia Law School, September 23, 1999, available on the Internet at http://www.sec.gov/news/speeches/spch295.htm.