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February 1, 2000

Nasdaq's Far East Future: Web-Based Trading Plan Launched in Japan

By Peter Chapman

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  • Nasdaq's Far East Future: Web-Based Trading Plan Launched in Japan

Those interested in the future of Nasdaq trading should watch the rising sun.

Nasdaq plans to usher in the "Internet trading era" in Japan by aggressively courting order-entry firms with web-based technology, according to Gregor Bailar, chief information officer at the National Association of Securities Dealers.

Nasdaq-Japan, a joint venture stock market created last June with Japan's Softbank, will be the first of many Nasdaqs to exploit the web-friendly transactions processing software of SSI Technologies (SSIT), an obscure Indian software developer.

Nasdaq and SSIT, a unit of SSI Ltd., recently formed IndigoMarkets to develop both the automated exchanges that will power Nasdaq-Japan, Nasdaq-Europe and eventually, Nasdaq-U.S., and to market web-based trading software to stockbrokerages.

Nasdaq's plan is to facilitate order entry firms' capture of market orders and their subsequent routing into an order-matching facility that will lie at the heart of the next-generation Nasdaq trading platform.

Online investing has had a huge impact on the Nasdaq-U.S. market, but most orders are routed to market makers or ECNs. Nasdaq wants to grab a share of those orders. An ECN-like exchange incorporating Internet technologies interfacing with a private label Internet brokerage system is seen as the way ahead.

Fate must have dropped SSIT into the arms of Nasdaq. Not only does the Chennai, India-based firm sell an award winning matching engine that Nasdaq needs, its chief business is supplying banks and brokerages with online transactions processing software.

Nasdaq's next-generation trading platform has been dubbed "supermontage." It is now a proposal under review by the Securities and Exchange Commission, but apparently good-to-go in Japan. In the U.S., supermontage is nothing less than a restructuring of the Nasdaq "market" along the lines of an ECN.

At its core is a matching mechanism known as the "Order Collector Facility" (OCF) that collects the bids and offers of market makers and posts them in an "Order Display Facility." The OCF also collects market orders and automatically executes them against those quotes.

SSIT's product, TESAMarkets will power the OCF. "The supermontage is already up and running in the Indigo environment in some form," Bailar said. "It doesn't have the same display yet. That still must be modified. But the capability to do some of the same key features of the supermontage are already being prototyped in that environment right now."

TESA stands for the Tandem Electronic Securities Architecture. TESAMarkets is an award-winning piece of code co-developed in the mid-90s by Tandem and SSIT (at that time, Indigo Technologies). It is essentially a stock-market-in-a-box. Three of its seven modules make up the three pillars which underpin all automated stock exchanges: an extremely fast matching engine; a risk management and surveillance (RMS) module; and a clearing and settlement module.

Nasdaq-U.S. is likely to be based on TESAMarkets. But not right away. In the U.S., this order-matching functionality is being adopted to the current Nasdaq environment. (The OCF, which encompasses a set of new execution algorithms, is expected to be built into today's Nasdaq system.)