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April 21, 2005

The Solution to Nasdaq's Woes?

By Gregory Bresiger

Nasdaq wants to have its cake and eat it too. It is trying to find a creative solution to the problem of its stalled exchange application. In a recent Securities and Exchange Commission rule filing

Nasdaq proposes eliminating, "(1) The internalization exception to the time priority aspect of the Nasdaq Market Center execution service's price/time priority execution algorithm, (2) Preferenced Orders; and (3) the Directed Order functionality of the service."

Is this the creative way that will allow Nasdaq to have its cake and eat it too? To finally become an exchange that qualifies as a National Securities Association and finally break free of its parent, the NASD?

Nasdaq's legal advisers certainly think so. In the filing they write, "The changes are being proposed to eliminate the issue that has prevented Nasdaq from registering as an exchange."

Indeed, Nasdaq's top attorney indicated, in a fourth quarter earnings conference call, that his company was sticking to its internalization guns. "The solution," said Nasdaq general counsel Edward Knight, "is built around corporate structure instead of market structure." Nasdaq is "optimistic" that its proposed solution will be accepted by the SEC. But NYSE officials disagree. They have argued that the SEC should not consider an exchange model that is outside the current legal definition of an exchange.