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May 31, 2001

Philly Revives Nasdaq Trading

By Peter Chapman

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Nasdaq trading is coming to the floor of the Philadelphia Stock Exchange.

Equity specialists at the exchange will soon be able to post bids and offers in Nasdaq's Level II (NWII) quote montage, as well as trade with market makers over SelectNet.

Making it possible is new technology installed at the PHLX - a market making system built by TradinGear, a small vendor based in New York.

It will mark the second time the exchange has revved up a Nasdaq trading program, having ended a previous program in 1996 after three years. The difference this time is TradinGear, a PHLX official says.

The immediate beneficiaries of the new service, scheduled to begin this summer, will be options specialists and the various other options traders, who have transformed the country's oldest stock exchange into a thriving options exchange.

Options specialists will be able to quickly hedge or lay off their positions. Floor brokers and other traders will be able to simultaneously execute trades that involve both an options contract and the underlying Nasdaq stock.

The Philadelphia exchange trades options contracts on 922 stocks, including 416 Nasdaq stocks.

Philly's goal is to eliminate 'slippage,' or the pricing disconnect experienced by traders trying to trade a Nasdaq stock at the same time they buy or sell an options contract on that stock. There is often a time lag between completion of the options trade and the related Nasdaq trade. The options trade can be done on the PHLX floor, but the Nasdaq leg must be executed over the telephone. The lag can ruin the economics of a transaction.

Installation of the new market making system will allow traders to do all their business on the floor. "From a trader's point of view, that is a tremendous convenience," said Sam Gaer, chief executive of TradinGear. "It gives him the ability to get the trade done in one package."

Not every equity specialist sees a coming bonanza in Nasdaq stock trading. One says there is little interaction now between equity specialists and options traders. "There is almost no trading in the underlying stocks coming from the options floor," said the specialist who did not want to be identified. "I'm not sure there is any great desire on the part of equity specialists to accommodate these kinds of orders."

Gaer says the system should be active by mid-July. The PHLX, however, is still awaiting approval from the Securities and Exchange Commission to trade Nasdaq stocks under the Unlisted Trading Privileges plan. A PHLX spokesperson said approval is expected in the coming weeks.


TradinGear was brought in because it can connect to both Nasdaq and the exchange's systems. The PHLX decided its own trading system, called PACE, would require too much reconfiguration to make it Nasdaq-compatible. PACE uses the CMS protocol (as does the New York Stock Exchange), an old and increasingly outdated communications language.