Gradually, the National Association of Securities Dealers is moving closer toward achieving its previously stated goal of creating a central limit order book (CLOB) for Nasdaq stocks. But while the NASD has filed a proposal with the SEC to build a display mechanism that has some elements of a CLOB (see story 3, below), it will likely once again face some stiff opposition from U.S. equity market participants.
Dr. William C. Freund, the former chief economist of the New York Stock Exchange and the current director of the Pace University Center for the Study of Equity Markets, said at a securities conference held at Pace last week that he is not in favor of a CLOB. "What a CLOB implies to me is that the CLOB becomes the marketplace, and will undermine the objective of competition," he said.
Freund's opinion, of course, was shared by many NASD member broker/dealers over one year ago, when the NASD sent its initial central limit order file proposal to the SEC. By creating such a book, some broker/dealers argued, the NASD would be competing directly with the members it regulates.
However, there is at least one key difference between the NASD's old CLOB proposal and the new so-called electronic order display window the NASD just proposed: the sharing of transaction fees. Unlike with old CLOB, transaction fees for orders executed over the display window would be divvied up between all market participants--including market makers and electronic communications networks.
Still, some industry observers believe there is no need for any kind of CLOB. Howard Lutnick, president and chief executive officer of interdealer-broker Cantor Fitzgerald L.P. said at the conference that creating a CLOB would hurt the Nasdaq market by widening the division between institutional and retail order flow. "What we need to consider is that stocks, especially liquid stocks like Intel, have an institutional component and a retail component, and those should come closer together...as opposed to in some sense having a CLOB separate them, and having retail order flow disassociated from the institutional," said Lutnick.