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May 31, 2002

Is ADF Dead on Arrival? Some Skepticism Over the Future of System

By Peter Chapman

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  • Is ADF Dead on Arrival? Some Skepticism Over the Future of System
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The Alternative Display Facility, the NASD's new trading venue, is slated

to launch soon, but some in the industry are not happy about it.

The ADF was mandated by the SEC as an alternative to Nasdaq's SuperMontage. It is a members-only quote-posting facility similar to the original Nasdaq of 30 years ago. The system will broadcast a "montage" of market maker and ECN quotes to members via market data feeds. Stocks traded include Nasdaq issues, as well as those listed on the New York and American Stock Exchanges.

The ADF will not offer electronic trading, but a complementary system called TRACS would have trade reporting. Only a handful of firms including the Island ECN have signed on to quote in the facility, which was built by Sweden's OM.

Holding Back

Broker dealers are not disinterested. ECNs, though, seem keener on the ADF than do market makers. Some firms are apparently holding back until changes and clarifications to the proposal are forthcoming. And as Traders Magazine went to press, the NASD was in the process of filing an amendment to the proposal with the SEC.

That move comes in the wake of stinging criticism from the Securities Industry Association and several ECNs. "The ADF proposal potentially impairs many essential aspects of the existing national market structure," wrote Stuart Kaswell, the SIA's general counsel, "such as transparency, linkages, market data, and best execution."

The NASD doesn't have much time left to fix any problems. As Traders Magazine went to press, the NASD was still committed to launching the ADF on June 28th. It also pledged to the SEC that the ADF would be "available" before SuperMontage was implemented. SuperMontage is scheduled to debut July 28.

What is meant by "available" has execs scratching their heads. Does it mean the specs are available on paper or the system is operational?

Whatever it means, execs say the dates are unrealistic. They want the ADF to be fully functioning for three to six months before Nasdaq is allowed to launch SuperMontage. They want time to get their systems ready and to test. (Several industry executives privately said they believed both SuperMontage and the ADF will be delayed by the SEC.)

"We believe the ADF is very, very important for the future of the market," said Sanjiv Gupta, director of research at Bloomberg TradeBook. "But what the marketplace needs for fairness is a smoothly operating ADF. We want a short period to get up and running. Otherwise, in that interim period, you still effectively have not created any choice."

How much of a choice the ADF truly represents is suspect. Its detractors say the NASD is incapable of effectively competing with Nasdaq, its offspring. Industry execs point to the ADF's fee structure and the legal and financial ties between the NASD and Nasdaq as potential drawbacks to its success.

No Encouragement

Nasdaq certainly doesn't think much of the ADF. "It's unlikely to be as effective as some of the other alternatives that are out there which are regional exchanges," Dean Furbush, the head of transaction services at Nasdaq, said at a recent SuperMontage conference. (The conference was sponsored in part by Traders Magazine.)