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March 1, 2002

Nasdaq Under ECN Attack: SuperMontage becomes the battleground. Will ECNs become critics or casualt

By Gregory Bresiger

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  • Nasdaq Under ECN Attack: SuperMontage becomes the battleground. Will ECNs become critics or casualt

Nasdaq's SuperMontage is going to help market makers, critics say, but others say they are carping merely because they fear the competitive pressures that are likely to increase later this year.

The controversial plan calls for the much-anticipated SuperMontage to begin operations this year. Its introduction raises many contentious issues in the trading world: Is it a way to provide better liquidity or a "flawed" proposal designed to help market makers take business away from the pesky electronic communication networks? And how will ECNs cope with a new structure that appears designed to take away some of the advantages they gained in the 1990s? Nasdaq's controversial SuperMontage continues to be debated across the trading industry.

Although ECNs won't close the door on using Nasdaq's coming trading platform, SuperMontage, most officials of these alternative-trading networks are fiercely critical of the current proposal for an order display and execution system.

"This is a system that was designed for market makers. This is a proposal that is very unfriendly to ECNs," according to Sanjiv Gupta, director of trading, research and strategy for Bloomberg Tradebook. "All we want is an equal and fair chance and we're not going to get it with the SuperMontage."

Nasdaq Defense

Nasdaq officials have consistently defended SuperMontage as a way to provide greater liquidity and clarity.

"It is an effort to develop, while still emphasizing the importance and criticality of Nasdaq as an open competitive system, a degree of centrality in the marketplace," Richard Ketchum, Nasdaq Stock Market President, said in a recent statement.

But Nasdaq officials also privately conceded to Traders Magazine that the system is biased in favor of market makers. However, one said that, "ECNs have had some great advantages on fees over the past few years and now we would like to correct that."

A market observer agrees with that. "Nasdaq has certainly designed a market maker oriented system. I think they have admitted this," said Jenny Drake, market structure strategist for Archipelago, an ECN which is in the process of aligning itself with the Pacific Exchange. Drake said that Archipelago had made its decision to transform itself before the unveiling of SuperMontage. Nevertheless, Drake agreed that the proposal favors market makers."SuperMontage will certainly have a bias for certain market participant classes," she said.

ECNs' biggest complaints against SuperMontage include:

* SuperMontage will force market makers and ECNs to display their best quotes and orders, which are their best asset.

* Nasdaq's previous partnership with NASD and NASD Regulation is going to give it unique advantages as an exchange and in the over-the-counter market, where it is now going to compete.

* Nasdaq will have the authority to dictate, by rule, the terms on which Nasdaq ECN will interact with other market participants.

Scott Peterson, a Nasdaq spokesman, answered these charges point by point:

SuperMontage, he said, will provide better transparency that will improve liquidity. "There will be much more depth, there will be five levels of transparency," Peterson said. If market participants want more liquidity, they must accept transparency, he said. "Nasdaq is formally severing its ties to NASD and will buy its services the same as any other exchange," Peterson added.