Internet-Based Exchanges in Japan and Europe on Nasdaq's Radar

The Nasdaq Stock Market last week unveiled plans to set up a European equity exchange that will eventually be electronically linked with both its established U.S. market and Nasdaq-Japan.

The Nasdaq Stock Market last week unveiled plans to set up a European equity exchange that will eventually be electronically linked with both its established U.S. market and Nasdaq-Japan, an all-electronic Japanese exchange that is scheduled to launch in the fourth quarter of next year. At the same time, exchange officials said that Nasdaq is in the process of selecting vendors it will partner with to build the Internet-driven Japanese exchange.

Speaking at a Japan Society luncheon in New York City last Wednesday, Frank Zarb--chairman and CEO of Nasdaq-parent the National Association of Securities Dealers (NASD)--said that sometime down the line, Nasdaq's Asian, European and American markets will be electronically linked to each other. Zarb, who declined to provide details on Nasdaq's European plan, said the interconnection between the different geographic locations jives with the NASD's strategy to create a 24-hour/per day trading environment.

"Ultimately, the most important thing we are doing is the globalization of our business," said Zarb. He indicated that more efficiency and liquidity would result with the creation of an interconnected Nasdaq-Japan and a Nasdaq-US, where the order book just gets passed along by the market makers. He also said that the new effort will allow NASDAQ to test its enthusiasm for state-of-the-art Internet-based trading abroad first. "The Internet allows for a new formula that will be in play abroad. We will then migrate that technology back to the U.S.," Zarb said.

Nasdaq-Japan--which will be co-run by the NASD and Japanese software giant Softbank--will be organized as a hybrid exchange that will combine a dealer market system with a central limit order book, according to a Nasdaq spokesperson. To create the exchange, NASDAQ-Japan expects to partner with a host of technology suppliers, including vendors that Softbank is "wired to," said Zarb.

The Nasdaq spokesperson added that a formal vendor selection process is already underway for Nasdaq-Japan. "We are looking at vendors for the establishment of a data center, and for trading technology and telecommunications, and thus far six vendors have been interviewed, " he said. Nasdaq's current technology partners in the U.S. include MCI Worldcom, Microsoft and Cisco Systems.

However, despite Nasdaq's enthusiasm for the soon-to-be launched Asian exchange, at least one Japanese entrepreneur at the luncheon expressed trepidation about the new NASDAQ-Japan market's ability to raise capital. "It has absolutely no track record for raising capital and so it's still a bit of a risk for

entrepreneurs," said Naoya Takuma, executive vice president of CareNet Inc., a Web-based healthcare service. Takuma said that when his company is ready to launch its IPO, it will most likely do so on Nasdaq-US, whether or not it is interconnected with Nasdaq-Japan.

On top of building niches in Japan and Europe, Zarb said Nasdaq plans to introduce a service through its Web site in the next few weeks that will allow investors to electronically tap into their online brokers. He also revealed that Nasdaq is looking at Internet-based e-commerce companies like Amazon to determine ways in which NASDAQ and Amazon can share customer research.