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November 1, 2004

Nasdaq Plays Rough With Rivals

By Peter Chapman

Also in this article

  • Nasdaq Plays Rough With Rivals

Loading Up With the BRUT ECN

Nasdaq needs technology and scale to turn itself around. Will its acquisition of the Brut ECN do the trick?

The embattled market's $190 million all-cash acquisition of Brut from SunGard, completed in September, gives it both outbound routing and greater liquidity. And with its price cuts from earlier this year, Nasdaq believes it now has the three elements to stand up to its more fortified competitors: the Archipelago Exchange and the INET ECN.

"Now we have everything lined up," says Chris Concannon, the executive vice president in charge of Nasdaq transaction services. "We've built our product to the level, if not greater, of the services of Arca and INET."

For the time being, the Brut system will operate separately from the Nasdaq Market Center, formerly known as SuperMontage. The creation of a single trading platform will not take place for another 12 to 18 months, according to Nasdaq. Brut runs on Sun Microsystem's Solaris technology, which has the capacity to process 11 million orders per day. Nasdaq runs on Tandem's Himalaya servers and can handle 50 million orders per day.

For complete integration, Nasdaq has yet to settle on one of these platforms or something completely different. Nasdaq spent some $100 million to develop SuperMontage. Although it has yet to merge the two trading systems, Nasdaq has brought them closer. The full depth of Brut's book will now be visible in Nasdaq Market Center. Previously, Brut only published its top of book in Market Center.

"An order coming in to take liquidity on the Nasdaq Market Center will sweep its natural liquidity as well as the Brut liquidity," explains Concannon. "That creates a much better pricing environment or liquidity experience."

Full depth may not be such a big deal though. Market Center subscribers only get full depth if they pay for Nasdaq's expensive TotalView data feed. Not many do. If they don't, they only get participants' best quotes. And, typically the shops that subscribe to TotalView also subscribe to Brut. As for orders coming into Brut, those that don't immediately fill can use Brut's order routing technology to automatically check Nasdaq Market Center. Brut was routing out unfilled client orders prior to the acquisition, but "on a limited scale," according to Concannon.

Finally, the speed of interaction between the Brut book and Nasdaq's book is slated to improve, says Concannon. "When you move the Brut match system into the Nasdaq data center, the two books are just closer together and the interaction happens quicker," the exec says.

The construction of this virtual book,' as Nasdaq is calling its two-platform offering, gives Nasdaq parity with INET and Arca. Each of the three major market centers now controls roughly 20 to 25 percent of all executions in Nasdaq stocks. Nasdaq does not like to dwell

on those numbers, though, preferring instead to highlight its share of prints. That figure was 53.5 percent on a recent day in September, according to data from the Wall Street Journal.

The National Stock Exchange - to which INET reports - has a 25.1 percent share while ArcaEX handles 20.7 percent. (Brut, which used to print on the Boston Stock Exchange, accounts for 11 percent to 12 percent of the Nasdaq total.)