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July 31, 2003

Can Nasdaq Make a Comeback? Layoffs and a new corporate culture are a sign of the hard times at Nas

By Desmond MacRae

"NASD is our regulator," Greifeld said. "You would not expect the FDA [Food and Drug Administration] to have a financial interest in Merck or Pfizer or Johnson & Johnson."

The problem is that the NASD retains a large share of Nasdaq, according to Greifeld. "While we think NASD is the gold standard with regard to regulation, we believe it's wrong for them to have a financial interest in us or in the companies they regulate."

"Separating Nasdaq from the NASD ties back into exchange registration," he added. "We can't do that right now because of SEC rules, but exchange registration will create an arm's length relationship where we buy regulatory services from them. The regulatory function is a key part for us helping to restore investor confidence in U.S. equity markets."

Nevertheless, Greifeld, who many believe was brought in to speed up the exchange application, seemed to downplay one aspect of it.

"Exchange status doesn't really change our ability to trade stocks away from Nasdaq," he said. Nasdaq, he noted, already trades some 15 percent of NYSE volume in the Nasdaq marketplace.

Another Nasdaq executive put it this way. "The resolution of the exchange application is just about the last legal step to separation from the NASD," said Christopher Concannon. He is a lawyer who has worked for the SEC, Island and Instinet before coming to Nasdaq in May as head of strategy and business development.

"But when we do, we won't operate any differently, than we do now," Concannon added. That's a comment that one might interpret as softening the shock of a possible rejection by the SEC. The SEC only says the application is under review.

No one will predict what the SEC will do, but Wall Street so far has considerable respect for its chairman William Donaldson. "He is intimately familiar with how the Street works, so we can guess the Nasdaq exchange issue will be resolved sooner rather than later," TowerGroup's Hegarty said.


As for the IPO, Edward Knight, Nasdaq's chief counsel, says flatly that even assuming exchange status, "An IPO is simply not being contemplated right now."

Some trading executives have privately said that the application has been overemphasized. Nasdaq now generally functions as a for-profit exchange. The previous Nasdaq leadership invested too much time on something that is of secondary importance, they say. There are more important issues to Nasdaq's future than the exchange application, they say. For instance, one trading industry pro said that Nasdaq may be able to steal a march on many of its competitors if the SEC grants its request to offer post-trade anonymity to market makers, a service that ECNs now offer.


"As soon as the SEC approves anonymity on SIZE, Nasdaq will dominate the volume. That's key," said Jim Dyer, co-head of trading for BrokerageAmerica. "Why would a market maker go anywhere else?"