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Spoofing, Surveillance and Supervision

Jay Biondo, Product Manager - Surveillance at Trading Technologies, co-authored an article along with James Lundy and Nicholas Wendland, both of Drinker Biddle & Reath LLP, reviewing the CFTC's regulations and expanding efforts, 21st century surveillance and supervision, as well as strategic recommendations.

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March 1, 2004

Nasdaq Index Hardball Doesn't Impress ArcaEx

By Peter Chapman

The Archipelago Exchange (ArcaEx), which recently launched its listings initiative, is crying foul over a rule change by Nasdaq.

Nasdaq amended a rule that governs participation in its high-profile Nasdaq 100 index. Now, if a company wants to enter or remain in the index, it must list its shares exclusively on Nasdaq. It cannot dual list elsewhere.

The move is more than symbolic as it could affect a company's stock price. That's because the popular exchange-traded fund (ETF) known as the QQQ is based on the Nasdaq 100 index. A trust administered by Nasdaq buys and sells shares of companies in the index based on investor demand.

If a member of the Nasdaq 100 were to dual list, Nasdaq would then eject the company from the index and sell its QQQ shares. The weight of all that selling would likely push down the price of the stock.

"What company would ever choose to list on another exchange and have that happen?" asked Gerald Putnam, chief executive of Archipelago Holdings, when he testified before members of the House Financial Services Capital Markets Subcommittee at a hearing last month. "It's a prohibition to dual listing and a disgrace."

It is also ironic. Nasdaq fought hard in Washington to force the New York Stock Exchange to repeal its Rule 500 that prevented Big Board-listed companies from listing their shares on other marketplaces. Six New York-listed companies recently dually listed their shares on Nasdaq.

Putnam sees Nasdaq's index rule change as an attack on ArcaEx's push to lure listings of Nasdaq companies. "It's Rule 500 in sheep's clothing," said Putnam of Archipelago, which operates ArcaEx. Nasdaq chief executive Bob Greifeld told the congressional committee the change was made at the behest of the companies in the index. "This is what they want," he said. "It is an attribute of the product."