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April 1, 2003

Nasdaq Fears NASD's ADF Advantage

By Gregory Bresiger

Nasdaq is concerned about proposals by the NASD that would extend free or dirt cheap fees on the Alternative Display Facility, proposals it says would put it at a competitive disadvantage.

"In essence," Nasdaq officials wrote in a letter to the SEC, "we believe that the current ADF fee proposal would have the effect of placing an unjust economic burden on the great majority of NASD members that have chosen not to use the ADF while benefiting the few firms that do use the system."

NASD wants to adopt a permanent fee schedule that would allow various forms of free or cheap trading. These include sometimes waiving transaction charges and trade reporting fees.

Many users of the facility were given discounts to sign up, but now the NASD wants to make those fees permanent. NASD officials had no public comment because the fee issue is pending with the SEC.

Nasdaq officials privately told Traders Magazine that the NASD is deliberately running the ADF at a loss so that Nasdaq members (many of whom are competitors of the ADF) would be, in effect, subsidizing this competitor by paying for its losses.

"They'd lose money on the ADF, but expect members to make good their losses," said an official with Nasdaq.

The Nasdaq letter, sent by Edward Knight, Nasdaq's general counsel, raises the possibility of ADF winning in the marketplace because of government favors.

"Given that the ADF is a creature of regulatory fiat rather than a competitive response to a marketplace need, the SEC should exercise extreme caution in assessing the appropriateness of the pricing for the use of the ADF. The creation and propagation of a government-mandated marketplace into a crowded field of competing markets raises the concern that the government-mandated market will be able to exploit its unique position as the chosen market and crowd out the other competitors," according to the letter.

SEC officials declined comment. The SEC, in what is called a 60-day abrogation period, has the option of doing nothing - in which the case the NASD's new fee schedule would become permanent - or requiring a hearing on the changes that would include a comment period.

Nasdaq is in an unusual situation. Nominally, it remains a creature of the NASD. But it will become independent of NASD once it achieves exchange status. That is what Nasdaq and William Donaldson, the new chairman of the SEC, are trying to expedite.