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Jared Dillian
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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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March 1, 2001

Success? Pros Debate SuperMontage

By William Hoffman

Nasdaq's final SuperMontage plan, which was recently approved by the SEC, will be either an outstanding success or a downright failure.

This is the view of industry officials mulling over the weighty approving order from the SEC.

To be sure, many parties interested in the outcome of nine amendments and 15 months' negotiations for SEC approval had not yet read the order. However, industry officials, who declined to be quoted by name, said parts of it appeared inconsistent and contradictory.

Some said that if Nasdaq fails to fulfill its agreement with the SEC, the commission could delay approval of Nasdaq's application to become a full-fledged exchange. The commission might even prevent the SuperMontage from coming online as scheduled in 2002, they suggested.

"The industry is going to have to be vigilant," said Cameron Smith, general counsel for Island ECN. "We have to keep up the pressure."

Nasdaq's commitment to ensure voluntary participation by establishing an alternative quote and trade reporting facility for members who don't want to use the SuperMontage was non-negotiable, said John Heine, an SEC spokesman. "If that is not done," he added, "the SuperMontage will not be allowed to operate."

Other provisions may be open to interpretation. Nasdaq acknowledged a "rebuttable presumption" that it would not be the exclusive Securities Information Processor (SIP) unless certain conditions were met. To avoid conflicts of interest over information wielded by Nasdaq against potential competitors, Nasdaq could operate as an exclusive SIP only if chosen in a competitive bidding process.

If the SIP issue is not worked out according to the letter of the law, the SEC could step in to block the introduction of the SuperMontage, according to some experts. The SIP has wide ranging implications for revenue-sharing arrangements on market data and on the governance structure of a SIP.

Nasdaq senior vice president Dan Franks said, "The way I read it is there is a presumption that we're going to investigate" not being the exclusive SIP. "I'm not sure there is going to be an exclusive SIP, and I'm not sure what would be the shape of it," Franks said. "We've agreed to consider all the possibilities, including the presumption that Nasdaq will not be the exclusive SIP, and the possibility of multiple SIPs."

Heine said the SIP provision is not a precondition for SuperMontage approval, but added that the SEC would implement a solution if Nasdaq didn't come up with one satisfactory to electronic communications networks and other parties. No one knows what shape the SEC's solution might take.

Pricing Algorithm

Smith said Island wanted the SuperMontage to include a net pricing algorithm, which would take into account both ECN access fees and ECN's ability to offer smaller best-bid-or-offer pricing increments. "If [SuperMontage] is going to punish us for charging a quarter-penny a share [in fees], then it should reward us for providing price improvements far superior to a quarter-penny a share," he said.

Smith added, "It's fair to be somewhat skeptical about Nasdaq's ability to implement the SuperMontage in whatever timeframe they've chosen, given their past difficulties implementing SuperSOES." Franks acknowledged that systems integration is a problem for the SuperMontage. On things like Saturday systems tests, he said, that cooperation has not always been forthcoming. "There's fault enough to go around," he said. [see page 44.]