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Ronald Jordan
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May 10, 2006

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

By Gregory Bresiger

Indeed, one trading official said the NYSE, when it goes into gap-quote mode and puts up a block, is running a print facility in the form of an exchange. Gapping quotes are a feature in the NYSE's hybrid plan that allows an intermediary in a fast moving market to make a quote wide, not letting a trade go through, the trading official said. The trader is letting a large print come out within that gap quote. This is what is referred to as a clean cross. This is the same thing as an internalized print, he said.

Another point of contention for critics of the current TRF plan is its supposed conflict of interest. Plan critics say TRF approval should require that Nasdaq must spin off its ACT system.

"Archipelago was forced to give up its WAVE system in order to become an exchange. The same standard should be imposed on Nasdaq," said this official, who declined to be quoted by name.

Those in the business making the case for Nasdaq dismiss the comparison of WAVE to ACT. Several trading officials have said the two are unrelated. WAVE, they note, was an institutional agency broker. The SEC, they say, determined that markets shouldn't own institutional brokers or agency brokers. That was in an SEC policy, they said.

An industry spokesman, asked about this point, said, "ACT was a trade reporting business that was started by the NASD. And today the only license under the federal securities laws that allows trade reports to be submitted to the public market, in a non-price-time priority is the NASD license," he said. "If you read between the lines, it's not the trade reporting facility that the NYSE objects to; it's internalization," according to the industry spokesman (See Washington Watch item on internalization). He added that every large brokerage in the trading industry that conducts internalization has a stake in the approval or the possible change of the TRF plan. Some brokerage executives have also said that, without the internalization practice and without the use of a TRF, they will be hampered in their efforts to find liquidity.

"They'll be hurt when they have to go outside of an exchange to find liquidity," said one trading executive who supports multiple TRFs.

The NASD, at press time, had yet to file the TRF plan, but it was expected to do so soon. Nasdaq needs to have the review process start moving soon if it is to meet its deadlines.

A Nasdaq spokeswoman referred questions on the timing of the TRF application to the NASD. The latter didn't respond to repeated requests seeking comment.

Capitol Hill Takes an Interest in the TRF Battle

The proposed Nasdaq/NASD trade reporting facility (TRF) is under fire from an influential house member, even as he continues to support the exchange itself.

Congressman Richard Baker (R-La), the chairman of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, predicts approval of the proposed TRF by the Securities and Exchange Commission will lead to a proliferation of similar facilities. And that could be bad public policy, according to Baker.

"The resulting proliferation of print facilities providing revenue and trade information to markets that have no nexus with the actual trades may contravene the public interest," Baker wrote in a letter to SEC Chairman Christopher Cox.

"If this approach is approved, other markets may have to follow suit simply in order to compete," he added.

Despite his questions about the TRF, Rep. Baker, in his letter, said he is still "fully supportive" of the Nasdaq exchange itself. But the exchange, the subcommittee chairman added, must be in compliance with rules that do not allow an exchange to take credit for trades that don't take place on an exchange.