A number of regional, domestic stock exchanges, which had years ago become signatories of the Nasdaq unlisted trading privileges plan (UTP)--the first step in permitting them to trade Nasdaq-listed stocks--have recently taken steps to turn that plan into reality.
Although the exchanges had expressed an interest in trading Nasdaq stocks by signing the UTP, they never completed the process, which entails providing a formal proposal and creating an interface to the Nasdaq.
Currently, the only regional exchange to trade Nasdaq-listed stocks is the Chicago, which, according to a high-ranking Nasdaq official, trades close to the 1,000 stocks that it is allowed to make markets in. The official says the Cincinnati and Pacific exchanges could be trading Nasdaq stocks in the next few months, with Boston and Philadelphia both having expressed interest in becoming active.
"We have a standing challenge out to other markets to come out and trade," says the Nasdaq official. "We'd be glad to have the NYSE or the Pacific or the Boston or the Philadelphia display right in here--if they've got the best price, let 'em have it."
The idea of rallying more exchanges to trade Nasdaq stocks parallels Nasdaq's vision that eventually all exchanges will become part of its SuperMontage. At a background briefing for reporters this week intended to explain some of the more obscure details of the SuperMontage proposal, Nasdaq officials also expressed just this sentiment. Officials said they were interested in having foreign exchanges, as well as regionals, listed in the collage. Listing a foreign exchange would require World Trade Organization approval, if multilateral, or Congressional approval, if bilateral. Nasdaq currently has no specific plans to list foreign exchanges.
Nasdaq is doing all that it can to move ahead with the SuperMontage, however ECNs are still fighting the effort. At the briefing Nasdaq officials tried to refute some of the ECNs arguments, explain some of its more obscure details and release some new aspects of the plan.
A Nasdaq official emphasized that almost 90% of the buy side is in favor of the proposal. He continued to explain that SuperMontage seeks to expand Nasdaq's current montage system by displaying three aggregate levels of bids and offers, providing for a reserve book feature to facilitate the handling of large orders and eliminating the risk of double executions.
Due to the current two-pipeline structure used to reach Nasdaq, in which quotes can be accessed through both the small-order execution system (SOES) and SelectNet, an order could be executed on an ECN's order book at the same time it is executed in the Nasdaq system. With SuperMontage, officials say, a single point of access "eliminates that all together."
Another feature of SuperMontage will be the ability for market makers to display multiple quotes at the same time-while differentiating agency from proprietary orders--thus, according to Nasdaq officials, limiting their need to display with ECNs. "This allows us to say you can display directly without paying a charge, or you can go to an ECN," says a Nasdaq official. "We suspect that some of these firms would just as soon not pay a charge to an ECN if they could display their customers directly in Nasdaq."
The system will have an anonymity feature but only in limited form. An order can be displayed and executed with anonymity but identities become public with post-trade confirmation. ECNs can provide anonymity throughout the trade.
Nasdaq officials stressed the idea that SuperMontage, if approved, will be a completely voluntary system, ECNs being required to do nothing but display their top of book orders, as they are currently required to do by law. One Nasdaq official attempted to explain why some ECNs are up in arms over the proposal.
"There are about 700 market makers, and we are going to give every one of them a chance to display an order directly without going to an ECN. So you have seven anointed systems ECNs that can display customers limit orders now, and we are going to give the capacity to display 700 new market-making participants," says the official. "Of course, they don't want 700 new competitors in that part of their business."
But a Nasdaq official gave a somewhat conflicting explanation as to why Nasdaq is not in competition with ECNs over order execution. "They do in a sense, just in the way Merrill Lynch does in a sense, compete with us for trade executions. When Merrill Lynch internalizes two customers' orders and trade reports it to us, that's just the way it is. When an ECN executes two customers' orders and trade reports it to us, that's just the way it is. If they want to be an exchange then they really are a competitor, because they go into another set of our revenue streams, which is the ability for us to charge for quotation data."
Toward the end of the briefing, Chairman and CEO of the NASD Frank Zarb spoke about the evolution of securities markets, saying SuperMontage was a necessary and inevitable step in the right direction for all investors. According to Zarb, that step, which currently awaits an SEC decision, has taken much effort. "It's almost 11 months since we submitted this thing. It goes out for comment, the comments come back, we answer the comments, we make some changes and answer the comments, the comment period is over. Then, there's another period of ...whatever you call it, and now we're back into a comment period."