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Jared Dillian
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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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December 1, 2003

The Nasdaq Renaissance?

By Editorial Staff

Also in this article

  • The Nasdaq Renaissance?

The timing couldn't have been better.

Two days before Nasdaq released its dismal financial results for the first nine months of the year, it announced Instinet would start posting its quotes in SuperMontage. Instinet's decision could prove a big shot in the arm for Nasdaq's beleaguered Transaction Services. The division has seen its revenues slump 40 percent so far this year compared to 2002.

Transaction Services which accounts for such key money-spinners as SuperMontage, NWII and ACT - is one of three business groups within Nasdaq. The other two, covering market data and listings, have also suffered this year, although not as much as Transaction Services.

NTS has seen its revenues sliced this year to $183 million from $302 million last year. This was due to a sharp reduction in shares executed on SuperMontage, trades reported to ACT and log-ins to NWII. The bloodletting occurred despite a drop in the broader market's trading of Nasdaq shares of only five percent.

NTS' poor showing is almost wholly attributable to moves last year by the three largest ECNs to snub Nasdaq's services in retaliation to its launch of SuperMontage. Declaring Nasdaq a competitor, they struck out on their own.

Instinet chose to post on the ADF and report to the NASD. Island chose to post on and report to the Cincinnati Stock Exchange. Archipelago aligned itself with the Pacific Stock Exchange.

Nasdaq soon felt the pain. During the first nine months of the year, the percentage of shares executed on Nasdaq fell to 17.6 percent from 27.9 percent. The percentage of trades printed at Nasdaq fell to 61.3 percent from 83.4 percent.

Instinet, which is merging its book with that of Island, will begin posting on SuperMontage on January 1. That should goose Nasdaq's transaction fees, but is unlikely to have much impact on ACT revenues. Instinet will not print to Nasdaq those trades done internally and, under a recent rule change, pays no fees for the automatic reporting of its SuperMontage trades.

NTS is now run by Chris Concannon, a veteran of Instinet and Island who is credited with spearheading the effort to bring Instinet back into the Nasdaq fold. Concannon was originally hired in May to head up overall corporate strategy, but was replaced in that role by Adena Friedman. Concannon, in turn, replaced Glen Wolyner as head of NTS. Wolyner left to "pursue other business opportunities," according to Nasdaq.

Traders Magazine technology editor Peter Chapman spoke with Concannon about the Instinet deal and the prospects for his 40-person group.

Traders: What did you have to overcome to bring back Instinet?

Concannon: The number one objection was the priority issue.

Traders: The rule that permits traders using SuperMontage to subordinate ECN quotes with access fees to those of market makers and order entry firms?

Concannon: Right. We eliminated that. Now ECNs have the same priority with auto-ex participants - a market maker or someone posting in SIZE. But they also had to agree on a cap of their access fees. Actually, they had both a market structure objection and an economic objection.

Traders: The priority issue was the market structure?

Concannon: Yes.

Traders: What was the economic objection?