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November 29, 2005

Nasdaq to Introduce More Crosses to Marketplace

By Peter Chapman

Nasdaq, in a move that could drain orders away from the major independent crossing networks, plans to introduce an intraday cross.

The new electronic system will mark the third crossing mechanism Nasdaq has introduced in the past two years. In March 2004, Nasdaq launched its closing cross. In July 2004, it launched its opening cross. The intraday cross, if approved by the Securities and Exchange Commission, would launch in early 2006 and trade both Nasdaq and listed names.

"Getting trades done in small- and mid-cap stocks is difficult," said Nasdaq executive vice president Chris Concannon, "so we set out to think up different ways to help the sellside and the buyside. The obvious answer was to introduce a cross using the same technology we use in our open or close."

As with the industry's major independent crosses, Nasdaq's intraday cross would attempt to match buy and sell orders of blocks anonymously and without exposure to the broader marketplace. Marketers of such dark pools' claim their systems reduce the likelihood of market impact.

Nasdaq's intraday cross will operate at four times during the day: at approximately 11:00 a.m., 1:00 p.m., 3:00 p.m., and 5:00 pm. All executions occurring in the first three sessions would occur at the mid-point of the National Best Bid and Offer. All executions occurring in the after-hours session would print at the closing price of the primary market.

Unlike the independent cross providers, Nasdaq will offer its system strictly to the sellside. Also, it will not charge for the service. These sellside customers, Nasdaq expects, would then repackage the cross for their buyside customers.

The attraction to the sellside, Concannon says, is twofold. They will be able to compete for orders that might otherwise have bypassed them for a competing broker's system. And they will not have to put their own customers' orders in a competing system. That reduces their costs. At the same time, it makes it harder for competitor systems to build up liquidity that could attract even more orders.

Nasdaq's plan to market the cross to the sellside for repackaging to the buyside is the same strategy it follows with its closing cross. "The closing cross is a buyside product," explained Concannon. "The sellside took it and sold it to the buyside." The closing cross, like the opening cross, is also free.

Currently, four brokerages offer agency-only crossing mechanisms to both buyside and sellside traders: Investment Technology Group, Pipeline Trading, Instinet and NYFIX. The New York Stock Exchange also offers a series of after-hours crosses.

A spokesperson for ITG, owner of the largest independent crossing network, POSIT, declined comment.