The hype is just about over -- but the battle for Nasdaq order flow continues to evolve. Nasdaq's much-ballyhooed SuperMontage order-display and execution system is expected to go live on Oct. 14, backed by market makers and ECN participants such as Archipelago, Bloomberg Tradebook and Brut. However, the two largest equity trade-matching systems -- Instinet and Island -- have elected not to post their Nasdaq quotes in SuperMontage. Rather, Instinet will display its Nasdaq prices in the National Association of Securities Dealers' Alternative Display Facility, while Island will post its quotes on the Cincinnati Stock Exchange.
Instinet and Island, of course, recently closed their merger. But it will take some time before they eventually integrate their matching engines, and it appears the former rivals have differing opinions on the readiness of the ADF -- a quote-display and trade-printing facility that was created, via a Securities and Exchange Commission mandate, to provide an option for ECNs that did not want to display their prices on SuperMontage.
The ADF has been criticized in some circles for not being a true competitor to SuperMontage, mainly because it does not possess any order routing or order-execution capabilities. Moreover, Instinet is the only ECN, to date, that has signed up to display its quotes in the NASD's facility. Indeed, NASD officials say that while other ECNs have inquired about participating in the ADF, Instinet will be the only firm posting quotes in the facility on Oct. 14.
Meanwhile, Island intends to display its Nasdaq quotes on the CSE -- at least initially. In fact, an Island spokesman says the ECN began posting its Nasdaq prices on the CSE in early August. The CSE project, he says, started with only a few stocks, but Island now displays all of its Nasdaq quotes on the all-electronic, regional-stock exchange.
Before deciding to display its quotes on the CSE, the spokesman says, Island talked with its subscribers to find the most efficient, low-cost facility for representing their Nasdaq orders. Thus far, he says, the CSE has proven to be the best destination for meeting those goals, but that could change if another ECN decides to post its Nasdaq quotes on the exchange.
A while back, the spokesman says, the CSE filed a rule-change application with the SEC -- one that would basically allow the market to emulate Nasdaq's price/time priority market model. But the SEC has yet to approve the CSE's application, and the situation could get messy if another ECN decides to display its quotes on an exchange that does not employ a price/time priority model -- because then the fastest ECN with the best price would not necessarily being assured of capturing customer orders. "The rubber doesn't hit the road until there is another market that is posting in (the CSE) .... But the minute somebody else does post there, it's a problem," says the spokesman.
With that scenario in mind, Island is trying to keep its posting options open. "Island has a program with the CSE that seems be pretty set for the immediate rollout of SuperMontage. But anytime thereafter, Island can review its (posting) decision," says a source close to Island.
As it moves forward its integration efforts with Instinet, Island may also re-evaluate the ADF, and could eventually join its former nemesis in support of the NASD's facility. But for right now, Instinet/Island have bigger fish to fry. Near the top of their agenda, of course, is the effort to integrate their matching engines. But the firms also have to try to protect themselves against further staff defections.
Last week, Island Chief Executive Officer Matt Andresen left the ECN to take a position as head of global trading at Sanford C. Bernstein, a securities firm. Andresen had been scheduled to assume the post of chief operating officer of Instinet's ECN unit, following the Sept. 20 completion of the Island/Instinet merger. Instead, he accepted a position with the securities firm, saying that he could not overlook a better career opportunity.
However, Sang Lee, an analyst covering e-trading at Celent Communications, wonders whether Andresen would have exited had Island not merged with Instinet. "I exchanged a couple of e-mails with Matt after he left, and he said the opportunity was just too good to pass up. But if he had the same offer before the merger, I'm not sure he would have taken it," he says.
More significantly, Lee says, the exit of Andresen casts a shadow of doubt about the strength of the Instinet/Island union. " In essence, he was sort of the face figure, or the spokesperson, for the entire ECN industry," he says. "So it should be interesting too see who survives the (Instinet/Island) shake up. I wouldn't be surprised at all if a lot of the folks at Island leave."
Whoever comprises the future management team of Instinet/Island should have at least one thing in common: a distaste for SuperMontage. An Instinet official recently said the firm decided not to post in SuperMontage, because to do so would be akin to "subsidizing a competitor." Island, meanwhile, has a major problem with a new pricing structure Nasdaq implemented earlier this year, which charges higher fees to SuperMontage participants that submit the largest amount of quote updates.
That said, however, even if Instinet and Island abstain from SuperMontage for a long period of time, the system still should get a lot of support from Nasdaq market makers -- as well as small-to-mid-size ECNs. Bloomberg Tradebook and Brut, a pair of mid-tier ECNs, will be posting all of their Nasdaq quotes on SuperMontage from the system's inception.
A Nasdaq spokesman says that Tradebook and Brut will be part of an estimated 500 Nasdaq participants that will display their prices on SuperMontage. Nasdaq, he says, intends to phase in the stocks it trades on SuperMontage, starting with five securities on Oct. 14 and extending all the way to the market's full complement of 3,900 stocks by mid-November. Some SuperMontage participants, he notes, will be routing orders to the system via order-management system vendors -- including SunGard's Brass.
Archipelago, the third-largest ECN, plans to be one of the participants in SuperMontage -- but only temporarily. Earlier this year, Archipelago launched the Archipelago Exchange, an all-electronic equity market that currently trades stocks listed on the New York Stock Exchange, American Stock Exchange and Pacific Exchange. And by January of next year, the Archipelago Exchange plans to begin absorbing the Nasdaq business of the Archipelago ECN.
An Archipelago spokeswoman says that the firm considered posting on the ADF, but eventually decided to temporarily display its Nasdaq quotes on SuperMontage -- partly because it plans to shortly migrate its Nasdaq business to the Archipelago Exchange and partly due to the fact that displaying on the ADF would have required Archipelago to make some "fundamental changes" to its trading system . "It did not make sense for us to put the work into the ADF, and then a month later launch the Nasdaq stocks on our exchange," says the spokeswoman, noting that the Archipelago Exchange expects to be a major competitor to SuperMontage after its Nasdaq conversion is finalized.