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May 31, 2002

Nasdaq's New Crown Jewel Will SuperMontage end Fragmentation?

By Peter Chapman

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  • Nasdaq's New Crown Jewel Will SuperMontage end Fragmentation?
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Will SuperMontage be worth the wait? Nearly three years after it was first proposed, Nasdaq's much debated trading system is scheduled to launch next month. If successful, it could boost liquidity, but it's unlikely to transform the inter-dealer market, pros say.

SuperMontage will display and grant automatic executions against multiple levels of quotations. Five levels will be visible in a new split-screen-aggregated in the top half and broken out in the bottom half. The remaining levels will be accessible on a time-delayed basis.

But traders say the market is already a super montage. Market makers can display and access multiple levels of quotations on ECNs. They can aggregate all those quotes on a single screen using technology such as PowerNet and ColorBook. They can hit and take each others' quotes automatically with SuperSOES.

In short, a trader can already post and take several levels of liquidity automatically. In this respect, SuperMontage's functionality will add nothing new.

Limit Orders

But functionality is not the story here, traders say. SuperMontage is special because it's owned by Nasdaq. As such, it could take the market to a higher level by increasing its depth and liquidity. That would happen if market makers displayed more customer limit orders on SuperMontage than they do on ECNs.

"The success of SuperMontage depends on how much liquidity market makers put into the system," said Larry Leibowitz, head of the equities division at Charles Schwab Capital Markets. The former head of the REDIBook ECN, Leibowitz is not convinced Nasdaq will reap a windfall.

Dean Furbush, Nasdaq's executive vice president for transaction services, notes, however, it is not critical for all of those orders to migrate to SuperMontage [see Questions & Answers, page 80]. As long as ECNs make their books available on SuperMontage, rather than on some other venue, those orders will be accessible via SuperMontage. To date, only Island and MarketXT have pledged to display their books in SuperMontage.

"It will absolutely be the case that the orders continue to reside on ECNs' books," Furbush said. "But they can reside in SuperMontage, also. An ECN must ask itself whether its customers are best served in SuperMontage or elsewhere."

In addition, many market makers consider SuperMontage "their system." An ECN is someone else's system. As dues-paying Nasdaq members, they have a vested interest in SuperMontage's success. Some traders have indicated they will shift their limit orders away from ECNs and onto SuperMontage. They also plan to display orders on SuperMontage that usually sit on their desks.

"I might have orders on my desk that go into my book," said Dennis Green, the former head of Nasdaq trading at Legg Mason. "I wait until they are in line [with the market]. Then I represent them in my quote. Going forward I will put them in SuperMontage and just leave them there."

Price Move

Like Green, many traders hold off displaying their non-marketable customer orders, or those unlikely to execute anytime soon given market prices. Such orders sit on traders' desks. Once the market price moves closer to the order's price, then a trader will include the order in his quote or place it on an ECN.