SEC OKs Nasdaq Trading System, Despite Objections

Although the Securities and Exchange Commission unanimously approved a new trading system for the Nasdaq Stock Market earlier this month, opponents are still concerned that it may decrease competition and increase costs to consumers.

The new system, called SuperMontage, gives Nasdaq traders options -- such as anonymity -- previously available only through competing electronic communication networks (ECN), which currently handle 30% of Washington-based Nasdaq Stock Market Inc.'s trading volume.

This could reduce competition by tilting the playing field away from ECNs and toward more traditional players. It could also accelerate the rate of consolidation among the ECNs, according to Alan Alper, an analyst at Gomez Advisors Inc. in Waltham, Mass.

But overall, the new system will make it easier for investors to get the best possible prices on stocks, he said.

"It's something that's been long awaited and has a great deal of utility for the industry," said Alper.

But Nasdaq has other problems, including the fact that it is more expensive than the New York Stock Exchange when it comes to buying and selling stocks, according to Barbara Roper, director of investor protection at the Consumer Federation of America in Washington.

"The SEC has approved a system that perpetuates all of the problems that exist in the current marketplace," she said.

An SEC report released Jan. 8 said that Nasdaq investors may be paying as much as 11 cents per share more than NYSE investors for stocks because spreads (the difference between the price at which an investor places an order and the price at which it is filled) can change rapidly.

Skipping Earlier Orders

One problem, said Roper, is that brokers often fill customers' orders by matching them internally with orders placed by other customers -- skipping over individual investors who might have placed orders earlier through ECNs.

SuperMontage, Roper said, just makes this process faster without fixing it.

But Nasdaq spokesman Scott Peterson said that the SEC study compared apples to oranges because Nasdaq lists the stocks of small companies that wouldn't qualify to be listed on the NYSE.

"In our largest securities, our top 50 stocks -- which, by the way, represent 53% of all the trading on the Nasdaq - our spreads were as good as theirs or better," said Peterson.

He added that Nasdaq's spreads have fallen by 75% since 1997 and will continue to drop under the new system.

Other critics of the SuperMontage trading system include ECNs such as New York-based Instinet Corp.

"The implementation of SuperMontage will exacerbate Nasdaq's costly and inefficient trading system," said Instinet spokeswoman Silvia Davi. "But it has come a long way from the original one that was introduced over a year ago."

In September, for example, Nasdaq agreed to do away with a controversial plan to automatically put prices offered through ECNs last on its list of available trades if the private systems charged extra fees to traders.

SuperMontage Primer
Highlights of the new system:
It is expected to be ready in the first quarter of 2002.
Displays will include second- and third-best prices, not just the best.
Brokers can separate their own trades from those of their customers without having to go through alternative trading systems.
Participants will be able to place anonymous bids and asks, though the executions themselves won’t be anonymous.

This story, "SEC OKs Nasdaq Trading System, Despite Objections" was originally published by Computerworld.

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