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September 30, 2000

Nasdaq Dismisses Monopoly' Claims: Berkeley: ECNs Will Have 460 Market Maker Competitors

By William Hoffman

The revolutionary system will transform Nasdaq into a super electronic communications network. And not everyone is pleased.

After about 12 months of debate, seven amendments, and four extended comment periods, most securities industry participants who aren't ardent supporters of Nasdaq's supermontage proposal have at least resigned themselves to it.

SEC spokespeople said there was no deadline for a final decision on the supermontage.

Nasdaq is not shy about its ambitions for the system.

"The supermontage provides the ability for the 450 [active] market-making firms to display their customer limit orders under the SEC order handling rules in alternative ways than they can at present," said Alfred R. Berkeley III, vice chairman of the Nasdaq Stock Market, in a recent statement. "The ECNs are going to have 450 new competitors."

Berkeley added, "We have come to a set of solutions that are very pro-competitive for the investor, that have support from the vast majority of buy-side firms, individual investors, and brokerages."

But not all industry participants agree.

"The supermontage is a sort of a back-door, sly way of undercutting ECNs," said John J. Wheeler, manager of equity trading at American Century Investment Management, in Kansas City, Mo. "We are always forced to choose between equal standing and anonymity."

With the supermontage, Wheeler said, "it appears that the NASD is heading in the same direction" as the NYSE, by listing orders from Nasdaq members and regional exchanges first. "We view that as a huge disadvantage to our shareholders," he added.

The supermontage will collect the market orders and marketable limit orders of market makers, ECNs, UTP specialists and order entry firms and match them against the bids and offers displayed in a so-called Order Display Facility.

Market participants will no longer send their orders directly to one another. Instead, Nasdaq will operate as a sort of gatekeeper, controlling the flow and execution of orders. All orders will be matched on price and time priority.

Features include automatic execution; display of the three best price levels instead of just one; trades of up to 999,999 shares; and the ability of participants to display agency and anonymous orders.

Nasdaq Stands Firm

Berkeley, countering claims that the supermontage will transform Nasdaq into a monopolist, said that if the assertions of "two or three ECNs" are examined closely, the truth is revealed.

These ECNs, he contended, have "an oligopoly position because of a quirk in the order handling rules that often cause market makers to send limit orders to ECNs."

That's at the heart of the issue. Nasdaq is "trying to open up limit orders to competition," Berkeley said.

Nasdaq claims it has acceded to many ECN concerns, so far posting seven amendments to its original, November 1999, proposal. One of the latest would give ECN orders the same place in the order processing queue as participants who don't charge a fee, providing the ECN either includes its fee in its quote, or the ECN tells Nasdaq that the price improvement offered by the displayed quote exceeds the hidden quote access fee the ECN charges.

Another amendment would give investors the opportunity to direct or preference certain orders to particular market makers or ECNs, providing the market maker or ECN agrees to accept those orders through a directed order process.