The Montagues and the Capulets. The Yankees and dem Bums. The Crips and the Bloods.
Before the books are closed, save space in the annals of turf wars for the one brewing between some
market makers and electronic communications networks, the new trespassers on Wall Street. The first rumble involves mega-market maker
, an ECN owned by day-trading firm
All-Tech Investment Group
, over almost $100,000 in trading fees the ECN says it's owed.
With ECNs grabbing a bigger share of Nasdaq volume, especially in
Internet stocks, they're treading on ground that just a few years ago belonged to market makers. But ECNs can't do everything market makers can, and some market makers think ECNs get an unfair advantage from current regulations. So at least partly out of protest, some fees aren't getting paid, not just by Knight and not just to Attain.
"A lot of what's going on reflects the reaction of the market makers to their territory being invaded," says Linda Lerner, general counsel for All-Tech. "I think that their territoriality about the activity of posting quotes has led to this refusal to pay the fees."
Knight Securities, a unit of
, has been dragged into
National Association of Securities Dealers
arbitration for not paying Attain fees on more than 3,000 trades executed using the ECN's orders between February and May of 1998, according to All-Tech's lawyer Bill Singer, with the New York-based firm
Singer says the case, which is at the discovery stage, is relatively simple. "The NASD says it's appropriate for an ECN to charge a fee," he says. "Knight was advised of their obligation to make payment and they've refused."
ECNs get paid a fee per trade while market makers make money off the spread, or the difference between stocks' bid and ask prices.
Knight calls the arbitration a test case. "All market participants should be able to charge fees, relatively identical fees, or they shouldn't charge each other any fees," says Kenneth Pasternak, Knight/Trimark's president and chief executive. "We would be willing to settle with Attain if the rules are applied equally to both."
Since Knight refused to pay, Attain cut the firm's access to its system. And in a June 1998 letter to the
requesting an investigation into Nasdaq stock trading, Singer wrote that 25 Nasdaq market makers, including Knight, refuse to pay Attain's fees. Singer says All-Tech has since settled with a number of market makers but will file complaints against others.
Knight says it pays fees only to ECNs to which it subscribes. It subscribes to three ECNs and also has a 14% interest in the
ECN, operated by
On the surface, the battle is over whether market makers should pay a fee to an ECN when the ECN is offering the best price on a particular trade and the market maker executes a trade using the ECN's price.
An ECN's best bid and ask for a particular stock are represented in the Nasdaq quote. An ECN can have the best bid or ask for the stock, which then becomes the quote for the stock. A market maker is required to get its customer the best price, so it would have to access that ECN's order through Nasdaq's trading and quote systems, even if it doesn't subscribe to the ECN. (Market makers often subscribe to several ECNs, which allows them to send orders through for a fee.) A January 1997 NASD regulation says market makers must pay a small fee per share when they trade on a price on an ECN.
To Pay or Not to Pay
"It is an important issue because it proves that if people are going to be out there making markets and holding themselves out to be part of the system, there should not be barriers to get to them," says Lee Korins, president of the
Security Traders Association
, an organization for traders at both sell-side and buy-side firms that is examining the issue.
Some ECNs say they have to be able to charge a fee for their services, although some have also expressed dissatisfaction with the current system. Some market makers say that since they have no choice but to execute using the best price, no matter where it is, they shouldn't have to pay a fee to get access to it. They also say that since they can't levy a similar fee, they are being treated unfairly.
, a small ECN that recently gained prominence when
each took almost a quarter ownership stake, says it also has had some trouble collecting fees from certain market makers. "It depends on the market maker," says Pat Murphy in Archipelago's compliance department. "We do collect quite a bit, but there are some who haven't paid yet."
But another ECN says it doesn't charge the fee because market makers can't do the same. "We do not charge anybody for accessing the quote because it seems like an onerous practice," says Steven Hughes, a senior account manager at the
ECN, a small, new ECN operated by
Concerns about a Tilted Playing Field
But who gets paid what is just one part of the conflict between market makers and ECNs. Players on
sides are urging regulators to come to up with a better, clearer way to manage the conflict, which will only get more intense as ECNs evolve into full-blown exchanges.
Market makers say their vocal protests are not just sour grapes. Knight/Trimark executives, for example, have fired off letters to regulators about what the firm feels is unbalanced treatment of ECNs compared to market makers. "We're comfortable as long as the playing field is level," says Pasternak at Knight/Trimark.
The fee issue is being looked at by the NASD, according to an NASD spokesman. However, there has been no formal announcement about an inquiry or a change in the rules.