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December 1, 2003

Nasdaq Exchange Prospects Improve

By Peter Chapman

Nasdaq is not losing hope in its three- year old campaign for exchange status.

Top Nasdaq executives are betting a review of market structure currently underway at the Securities and Exchange Commission will now lead to a new definition of a stock exchange. These officials expect Nasdaq - which applied for exchange status in November 2000 - to fit the new legal description.

The SEC has said it will soon release for public comment a series of proposals to reform market structure. One proposal expected is a plan to weaken or eliminate the listed market's controversial trade through rule.

Nasdaq contends that any move to weaken the trade through rule is tantamount to a reversal by the SEC of its long-held belief that strict price/time priority is a lynchpin of a stock exchange's order handling methodology.

This rule requires players in the listed market to trade first against those quotes that first set the market's best prices. By contrast, Nasdaq traders must honor the market's best prices, but not necessarily those that came first. The absence of a trade through rule allows market makers to internalize their order flow.

SEC Chairman William Donaldson has stated Nasdaq's lack of a central limit order book offering price/time priority is a reason to deny it exchange status. But with the SEC looking to revise the trade through rule, Nasdaq execs see a new opportunity to press their case.

"If they address market structure reform," Chris Concannon, Nasdaq's former head of strategy and new head of transaction services, "then, by definition, they are picking a market structure. And if that market structure looks like the Nasdaq market structure, they can't say Nasdaq still does not have the ideal market structure to be an exchange."[see Questions and Anwers.]