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May 10, 2006

Nasdaq's Print Facility Draws Critics: TRFs for Everyone?

By Gregory Bresiger

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  • Nasdaq's Print Facility Draws Critics: TRFs for Everyone?
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The trade-reporting saga continues. Nasdaq's proposal for a trade reporting facility (TRF) will either blaze a new regulatory path for other exchanges or will steal a march on them. That's the nub of the debate over the TRF plan, which is crucial to Nasdaq winning final approval of the exchange by this summer.

The proposal, pending before the SEC, is critical for Nasdaq. That's because, without final approvals, it is unlikely to become fully operational. The exchange was recently okayed, but regulators stipulated that the TRF must be separately reviewed. Under the Nasdaq exchange application, most transactions would be executed using

traditional price-and-time priority as is the case now with all other national securities exchanges.

Nasdaq's exchange twist is that orders internalized by NASD broker-dealer members, orders that might not have price-time priority, would be reported through the new TRF. The facility would be jointly administered by Nasdaq and the NASD, using a limited liability corporation.

Nasdaq critics complain that the Nasdaq and its former parent are far too chummy. They say that is because Nasdaq is going to become one of the NASD's bigger clients.

The TRF joint venture between Nasdaq and its former parent, NASD, has triggered considerable controversy. For example, the plan calls for the money paid by broker-dealers for trade reporting services to go to Nasdaq. This includes crucial market data revenues. Nasdaq officials, who have consistently said they see no reason why the TRF won't be approved, have dismissed these criticisms.


Several of Nasdaq's critics, most of whom are competitors, said any successful TRF plan must ensure that revenues will not be retained by Nasdaq.

"Actually, we don't have a problem with the trade reporting facility itself," one TRF plan critic told Traders Magazine. "We just don't want a TRF that gives Nasdaq market data revenue attached to internalized prints. We also think that the SEC should let NASD keep the market data revenue and thereby reduce broker-dealer regulatory fees."

Nasdaq exchange critics are arguing that the new exchange is carrying many of the benefits of a utility/regulator into a new life as a for-profit exchange. But a Nasdaq official insisted that approval of the TRF plan entails no special privileges.

"We have specifically created the trade reporting facility to have a non-exclusive relationship with the NASD," according to Chris Concannon, executive vice president with Nasdaq. "The TRF has opened the way for any exchange in the U.S. to now conduct trade reporting business where they couldn't do this before," he added

Still, TRF critics also have publicly contended that the use of TRF revenues by Nasdaq would amount to an unearned "windfall."

This, they complain, would give Nasdaq a decided advantage over its competitors. That is unless they were also able to reach similar deals with the NASD that result in multiple TRFs.


"The big issue here," another TRF critic said, "is the windfall of unearned market data revenue that will be used by Nasdaq to pay for more print revenue by giving market data rebates. The issue is the revenue. It's not the facility itself."