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February 24, 2006

Nasdaq's Next Battle: Trade Reporting

By Gregory Bresiger

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  • Nasdaq's Next Battle: Trade Reporting

Nasdaq, which last month finally won approval to operate as a national securities exchange, faces another potential battle over a proposed trade reporting facility (TRF).

The TRF, which must go through a separate regulatory review process, would be run in connection with the NASD. Money paid by broker-dealers to NASD for the services of the TRF would be remitted to Nasdaq. This is a proposal that angers many Nasdaq competitors.

A Big Board official said the TRF plan "makes no sense."

Nasdaq's exchange application limits the scope of the new exchange to transactions in the Nasdaq Market Center, previously known as SuperMontage and Brut. These transactions would be executed in price and time priority, traditionally one of the hallmarks of a national securities exchange. But orders internalized by NASD's broker-dealer members orders that may not have price/time priority would be reported through the new TRF. The facility would be administered by the NASD, Nasdaq's former parent. But Nasdaq would receive the revenues, a sore point with Nasdaq competitors.

"If Nasdaq cannot retain ownership of trades that don't occur within its own market center, why should it continue to retain the monetary benefits? It makes no sense," said Robert McSweeney, senior vice president, competitive position, New York Stock Exchange.

McSweeney argued that, with the implementation of Reg NMS, Nasdaq will be receiving $25 million to $50 million in tape revenue that it "has no business accruing." McSweeney says there is no way to hedge the internalization issue. He says it should be banned.

Dave Herron, chief executive with the Chicago Stock Exchange, said the TRF proposal is confusing because it changes how exchanges have traditionally functioned. Historically, exchanges have not been allowed to provide trade reporting services for those who internalize. Exchanges traditionally have not been allowed to provide trade reports out of time sequence, but Nasdaq officials have said that the rules have been interpreted in various ways.

"Trades executed in the internal systems of NASD members, would be reported under NASD rules to NASD's Alternative Display Facility or a proposed new NASD facility," according to an amendment to Nasdaq's exchange application. The new facility would be jointly owned by Nasdaq and NASD. But it would be under the regulatory control of the NASD, according to Nasdaq.

The New York Stock Exchange does not object to the establishment of a TRF by NASD. The problem, as it sees it, is with the transfer of the market data revenues from the NASD to Nasdaq.

Herron warned that approval of the TRF plan could change the role of his specialists, who could leave the floor to become NASD members. He also said that it could also lead other exchanges to set up outside trade reporting facilities.