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April 21, 2005

Back to the Glory Days? Greifeld Returns Nasdaq to Profitability

By Gregory Bresiger and John A. Byrne

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Robert Greifeld wants to restore the glory days of Nasdaq's rule in the over-the-counter world. But is that possible in today's fragmented trading

markets? Nasdaq faces a bevy of challenges - a stalled exchange application, the potential threats of Reg NMS and trading rivals with more efficient platforms. "We always like to behave in a paranoid fashion and believe that we need to do everything right in order to ensure our survival," Greifeld, Nasdaq's president and CEO, told Traders Magazine. So Nasdaq - after a decade of leadership changes, market share losses and an occasional scandal - faces its greatest challenges since it was created in the early 1970s. Back then, Nasdaq had neither the competitive nor the regulatory problems that Greifeld must now solve.

"I would just say this: We feel we are in a better competitive position than we have been at anytime in the recent past and we believe that our customers are recognizing that we have made dramatic strides," Greifeld says.

Nasdaq Baggage

A random sampling of Nasdaq trading participants by Traders Magazine confirms Greifeld's upbeat assessment. Still, many trading professionals also say that Nasdaq competes with more cost-effective firms. Nasdaq has much to overcome.

"Nasdaq shot itself in the foot by becoming an ECN and then going into other businesses and competing with the broker dealers and the ECNs," says Aldo Parcesepe, who is regarded as a conscience of the traditional Nasdaq market maker community. "There's a lot of work to do. Nasdaq was a mess when Greifeld took over," adds Parcesepe, the head of Nasdaq trading at Bear Stearns.

But competition remains daunting. That's because the Nasdaq Market Center platform - formerly known as SuperMontage - has not nearly accomplished what prior Nasdaq leaders promised. Indeed, excluding Nasdaq's internalization business, Nasdaq, INET and Archipelago each have about a quarter of the OTC market.

"SuperMontage failed because, by the time they got all the approvals, it was too late. Many of the initiatives weren't new anymore," says Jodi Burns, a former Nasdaq strategist and an industry analyst with Celent Communications.

Celent, back in the fall of 2003, expressed a consensus opinion that SuperMontage would lead Nasdaq to dominate the OTC market. It never happened, Burns says, and it is now easy to see why.

Besides requiring dual approval - from Nasdaq and its parent NASD - of all Nasdaq projects, Burns says the SEC also required that SuperMontage's specifications had to be disclosed to all ECNs. "By the time it was operating, much of SuperMontage just wasn't new anymore," she adds. Nasdaq, Burns insists, must escape from its parent.

Greifeld betrays no hint of tension between the NASD and Nasdaq. He calls the NASD the "gold standard of regulation." Still, regulation is a huge day-to-day expense problem for Nasdaq. It has a limited ability to reduce its regulatory costs. Nasdaq today doesn't have the legal powers of an SRO. So Nasdaq is now required to obtain its regulatory services from NASD, a service for which it paid some $76 million in 2002 and $61 million in 2003, the same regulatory costs as when it was part of a monopoly.