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September 30, 1998

Nasdaq Prepares for Web Market Making: Pilot Program Is Prologue to Trading-Cost Reductions

By Om Malik with staff reports

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Nasdaq will learn next year just how well an Internet-based market-making trading system performs.

Several Nasdaq trading desks are among the guinea pigs for a pilot program aimed at testing the reliability and security of the Internet-based successor to Nasdaq's Level II workstation. And the results of the pilot will be watched with anticipation, if not bated breath.

"The Internet is going to be the highway of the markets of the future," said Gregor Bailar, chief information officer of the National Association of Securities Dealers, Nasdaq's parent.

"We see it as an enabler and a catalyst, which helps create a more liquid and a more efficient market," he added.

Nasdaq declined to identify the participants in the pilot, though it said market makers and others will be involved. "It is limited to a small group," a spokesman for Nasdaq said. "Our goal is to implement the pilot by the middle or the end of next year."

If the results of the pilot are encouraging, Nasdaq may never be the same again.

The machinery for market making on the world's largest intranet (or extranet, as others describe it) would no longer include an expensive proprietary network. Rather, it would be replaced by the World Wide Web and 6,000 PCs, instead of 6,000 trading terminals.

Today's proprietary network is vast, encompassing Unisys 4800 mainframe-based computers for stock quotes, and clusters of Tandem Himalaya K20,000 computers running Nasdaq's transactional systems, including SOES and SelectNet.

Most importantly, market makers would welcome the Internet's potential to drive transaction costs down on each trade executed on Nasdaq.

Driving down costs, in fact, may be the most important goal for Nasdaq as the new millenium nears.

Undoubtedly, it could make Nasdaq the most efficient and lowest-cost equity market in the world, at least until competitors catch up, analysts suggest.

Transaction costs could be reduced by an estimated 50 percent. Not surprisingly, doing so is a favorite theme of Nasdaq President Alfred Berkeley.

"We strongly believe that the future belongs to the market that is the low-cost provider," trumpeted Berkeley in a speech before professionals last year at an equity-trading conference sponsored by New York's Baruch College.

"In other words," he added, "markets will follow costs. They have in every other market, and they will in ours."

Berkeley's ascension to the top post at Nasdaq in June 1996 was no surprise, given his background as an analyst in electronic commerce and software development when he was a managing director at Baltimore-based Alex. Brown & Sons, the predecessor firm of BT Alex. Brown & Sons.

Some Doubts

While some analysts doubt that Nasdaq will move market making onto the Internet anytime soon, the electronic dealer market has nonetheless shown what can be done in other areas.

In 1998, Nasdaq will spend more than $14 million developing its current sites, twice as much as it did in 1997. (Overall, Nasdaq has earmarked $600 million over five years for the expansion of its network.)

Berkeley is adamant that Nasdaq must move the entire marketplace onto the Internet to remain a viable entity. His view is that Nasdaq's technology curve has peaked. No matter how much more is invested, performance will not improve appreciably.