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March 1, 2003

Nasdaq Wages War For ECN Order Flow

By Peter Chapman

Nasdaq, in a bid to wrest market share from ECNs, changed its rules to allow order entry firms to post certain limit orders on SuperMontage.

Non-market making NASD members can now post non-marketable limit orders, or those whose prices are inferior to the market's best, directly onto Nasdaq's new trading system. Previously, only dealers could do so.

Order entry firms could only post marketable limit orders, or those whose prices create or match the market's best prices, in SuperMontage.

Agency brokers that wished to post so-called "resting" orders on SuperMontage did so indirectly via ECNs.

However, one of the largest ECNs, Instinet, does not represent its quotes in SuperMontage. A second, Archipelago, is moving its quoting activity off Nasdaq to its new exchange, ArcaEx.

Nasdaq says its decision means that traders using defector-ECNs will still be able to post on SuperMontage. "Over the past few months, more and more orders, generated by non market-making broker dealers, are displayed in unlinked markets," said Rick Ketchum, Nasdaq president. "We believe it is critical to bring this liquidity back to SuperMontage."

At least one agency broker is pleased by Nasdaq's move. "If most of the liquidity in a particular security is on SuperMontage," said Randy Abernethy, president of UNX, "then giving people access to post there gives them an advantage."

Abernethy notes that a security may trade more shares in one market than another.

"Nasdaq is moving to compete toe-to-toe with the ECNs," he added. "They're taking down the boundaries that prevent people from adding liquidity."