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April 21, 2005

The Buzz About Pre-Opening Trading

By Peter Chapman

The volume is small potatoes compared to the hundreds of millions of shares Nasdaq typically processes in the first hour of the trading day. And it's certainly small compared to the some one and half billion shares Nasdaq trades on some days. But Nasdaq is optimistic about its latest technological marvel: the opening cross. The opening cross is handling about seven million shares per day. However, Nasdaq execs say the cross, which was introduced late last year, will soon capture most early morning retail flow. "Over time all those [retail] orders will congregate there," says Chris Conncannon, Nasdaq's head of transaction services. "The cross is so efficient and centralizes order flow at the most important time of the day."

The opening cross is both an execution facility and a trading process. Orders are submitted between 7:30 a.m. and 9:28 a.m. At 9:28, Nasdaq broadcasts securities' indicative prices and "order imbalances." That's the differences between the buy and sell amounts. The information helps pros submit orders to clear up any imbalances. At 9:30, the market opens and the cross matches buy orders against sell orders. An opening price is discovered. The introduction of the opening cross was the first of two significant changes in the way Nasdaq dealers conduct pre-opening trading. The second came last month. Nasdaq required dealers to make their quotes available for automatic executions starting at 8:00 a.m. The opening cross became fully operational in December about nine months following the launch of Nasdaq's closing cross. It immediately had problems. On December 17, matches in the Nasdaq 100 Index Tracking Stock, or the QQQ, went awry due to an imbalance glitch. Investors lost $20 million, according to published reports.

QQQ traders aren't the only ones grumbling. Knight Trading Group, the largest Nasdaq trading house, expressed concern recently over the cross' impact on Knight's profits. "The opening cross and things like that at Nasdaq have fundamentally changed how we do business," Tom Joyce, Knight's president, told analysts. "That has affected the macro trend of our ability to continue having a high revenue capture per share." Knight is one of the largest participants in the opening cross. Still, not all market makers are fretting. Wedbush Morgan, a smaller dealer, plans to give its professional customers access to Nasdaq's crosses, via its direct market access technology. Concannon may finally get his retail flow.