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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

Curently, SuperMontage's SIZE feature only offers pre-trade anonymity. According to the Nasdaq filing, "Anonymity is important to market participants because sometimes the identity of a party can reveal important market intelligence and complicate a member's ability to execute its customer orders."

The filing continues: "If members see a pattern in which a particular member is actively buying a security, and it is commonly known that this member handles the orders of several large institutional customers, such as pension funds or mutual funds, the other members can adjust their trading strategy for that security in anticipation of the strong demand that should develop as the member attempts to fill the order of one or more of its large institutional customers."

This kind of service, several pros say, is far more important to Nasdaq's future than whether its exchange application is approved or not.

"Let them straighten out their trading platform. Let them spend more time on recovering lost revenues. Those are more important than the application," said one trading industry executive. There's no doubt, this pro added, that the application has been a dicey proposition because its approval would be a signal change in regulatory philosophy.

The experience of American regulators over decades is that an exchange is central. This has been a stumbling block for Nasdaq, the mother of new wave markets. Greifeld insists that Nasdaq's resistance to a central limit order book, or CLOB, will continue.

"If we were for it, our exchange application would have been approved a long time ago," Greifeld said. "Our exchange application is difficult for the commission [SEC] to address because we stress the values of competition. They are accustomed to a CLOB, but we are saying we want multiple competitions for all order flow. That model simply precludes the use of anything central."

"Investors are getting a better deal than in the most important traditional market," added the Nasdaq CEO, referring to the NYSE.

Greifeld, unsurprisingly, took another crack at the Big Board. "There are 15 seconds between a Nasdaq execution and any NYSE CLOB execution. Nothing good for investors can happen from the time they click buy or sell to when they get the execution back," Greifeld said. "The shorter that time interval is, the better."

And staying with this model, Greifeld added, also means that Nasdaq is not going to depart from the principles of internalization. "We are about internalized competition, not centralized regulatory demands that apply to a different exchange model," he said.

An Adjustment

So Nasdaq will adjust its model, but it won't trash it. And that's because, Nasdaq's supporters say, the one time utility, now under new leadership with an entrepreneurial background, will be able to make the transition to a more competitive environment. In fact, some say, even allowing for its mistakes, Nasdaq has muddled through to this point.

"Nasdaq will survive and continue to evolve," said Atwell. He said the NYSE model is in greater danger than Nasdaq's.

"I think Nasdaq has done a very, very solid job for the marketplace," said Mark Madoff, a trading director for market maker Bernard L. Madoff Investment Securities.

Nevertheless, he concedes that there are many trials around the corner for Nasdaq. "They have a tough road ahead," Madoff said.

-with additional reporting by Gregory Bresiger and Peter Chapman.