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February 1, 2001

Nasdaq Setback for SuperMontage

By Staff Reports

Nasdaq stumbled as soon as it attempted to take the next brave step for its SuperMontage.

After the Securities and Exchange Commission approved the controversial trading system last month in a 4-0 vote, the Nasdaq plan had a technological problem.

The problem was SuperSOES, a major technical piece of SuperMontage which Nasdaq hopes to introduce early next year.

Before that happens, Nasdaq's SuperSOES is expected to replace its current SOES and SelectNet facilities, providing automatic execution capabilities that it does not have now on SOES.

SuperSOES is causing sleepless nights among Nasdaq executives: Three tests thus far have not been successful. Because of that, Nasdaq was forced to delay SuperSOES' introduction last month. It says it is aiming now for a "post-decimal time frame" launch. (Translation: If Nasdaq officials are lucky, it will be ready by the early summer).

Embarrassment Compounded

Nasdaq's embarrassment was compounded when the last of the unsuccessful tests was conducted on the Saturday coinciding with the mid-winter conference of the Security Traders Association of Chicago. Word of the outcome stirred much conversation. The failed tests worried some traders who pointed out that the SuperSOES backup facility took more than 40 minutes to become effective during testing. Nasdaq says it is working to fix the problems.

Despite the setback, Nasdaq is ploughing ahead. After nine amendments, name calling - Instinet labeled the proposal SuperMonopoly - and back and forth negotiations with ECNs and others, SuperMontage now awaits implementation.

At its simplest, SuperMontage would confer on Nasdaq some of the raison d'tre enjoyed by electronic communications networks - the ability to accept and execute limit and other orders from investors automatically and anonymously and on a purely voluntary basis. (Investors have the option to direct orders to the ECN or market markets of their choice.)

ECNs may not have as much to fear as others would imagine, some observers say. "I don't think the SuperMontage will be an ECN killer," said James Lee, president of the Electronic Traders Association. "I don't believe for a moment that Nasdaq can compete with the Islands and the Market XTs of the world."

Sen. Phil Gramm (R-Texas), chairman of the Senate Banking Committee, told Nasdaq and the SEC that he wants Nasdaq's name taken off any final SuperMontage facility, citing concerns about unfair name-branding. Furthermore, Gramm said he wanted the NASD to divest itself completely from a privatized Nasdaq operating SuperMontage. He cited concerns that NASD members might feel pressured to use the Nasdaq facility as long as NASD was still a part-owner.

More broadly, SuperMontage will set out to create a more conventional style of stock market. The new system would allow market participants to fulfill their obligations under the order handling rules, centralize stock quote information - providing the three best bids and offers in each stock - and aggregate share volume to provide investors a picture of the market depth. Each market participants' best quote would also be displayed.

SuperMontage would allow institutional investors to buy and sell blocks of stock without revealing their identity. To that end, Nasdaq added a "reserve book" so that traders would have their quotes automatically replenished as they worked their orders.

ECNs, for their part, won an important concession, when Nasdaq dropped a provision that would have mandated the inclusion of access fees in ECN quotes. Now that has become an option for investors. (Other changes allow traders to execute the best orders based on size and price.) The SuperMontage has three execution options: price/time; price/size and price time with ECN access fees.

More Information

During the comment period, many trading professionals stated that SuperMontage would improve Nasdaq by providing more information to investors. But 14 commentators, according to the SEC's "approving order," said it would have a negative impact on competition. The Philadelphia Stock Exchange believed that the SuperMontage would result in an "unacceptable concentration of market power in the NASD at the expense of the regional exchanges...Under the SuperMontage proposal, Nasdaq will function as its own [Intermarket Trading System without providing] for any representation." Nasadaq, in response, said that it "in no way establishes the SuperMontage as the sole means for providing or accessing liquidity. NASD members, individual investors, and members of other exchanges will be free to route their orders to any market center they choose."