In a clear sign that it is ready to compete head-on with SuperMontage for Nasdaq transaction supremacy, Instinet, last Friday, agreed to post the majority of its over-the-counter quotes on the National Association of Securities Dealers' Alternative Display Facility. Instinet - the global agency brokerage firm that owns and operates the largest electronic communications network - made its support of the ADF official last week when it sent the Securities and Exchange Commission a letter certifying that it would use the facility. In so doing, Instinet also delayed the rollout of SuperMontage. Nasdaq's order-routing and execution network is now set to launch on October 14, but it would have gone live on Sept. 17 had Instinet - or any other ECN - not offered its support for the ADF.
Last year, as a condition of its approval of SuperMontage, the SEC ordered the NASD to build the ADF, a quote display and trade reporting facility that is supposed to provide an option for ECNs that do not want to post their bids and offers on Nasdaq's network. However, following its launch on July 29, the ADF did not receive Nasdaq quotes from any ECN and, one moth later, the SEC - concerned with the market's apathy for the facility - ordered ECNs to officially either support or shun the ADF.
Specifically, the commission ruled that ECNs that wanted to participate in the ADF had to certify their support for the facility by Sept. 6. If any ECN sent in its certification by that date, the SEC ruled, the rollout of SuperMontage had to be delayed until at least Oct. 11, to give ECNs time to get up and running on the ADF. However, if ECNs collectively failed to send in certification letters, SuperMontage would have been given the green light to launch on the earliest date possible for Nasdaq.
An Instinet spokeswoman confirms that the ECN sent its ADF certification letter to the SEC last Friday, but declines to comment further. However, in an earlier interview with WS&T Week, an Instinet official said that it was very likely that the ECN would post its quotes on the ADF - because displaying bids and offers on SuperMontage would be tantamount to handing business to a direct competitor. The official did express concerns about the lack of "industry-wide" testing on ADF, but Instinet has apparently come to the conclusion that it can conduct all the tests, and make all of the necessary programming changes, required to establish connectivity to the facility by Oct. 11.
At press time, it remains unclear whether the SEC received certification letters from any other ECNs. Island, the second-largest ECN, agreed to merge with Instinet earlier this year, and it therefore seems likely that the SEC received ADF certification from at least two ECNs. However, officials at Island and the SEC could not be reached by press time.
In the month of July, the Instinet ECN accounted for approximately 18.7 percent of the total volume in Nasdaq-listed stocks. Combined, Instinet and Island would represent significantly more than 20 percent of Nasdaq's volume. Nasdaq envisions SuperMontage as a central liquidity pool that could significantly reduce market fragmentation, via offering market participants a large, single venue for quoting and executing orders. But Instinet and Island are also in the execution business, and could pose a serious threat to SuperMontage if they decide to drive traffic to their internal matching engine by posting their collective quotes outside of Nasdaq's platform.