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June 6, 2006

NYSE Lobbies Against NASD/Nasdaq Project

By Gregory Bresiger

Big Board officials are pushing big trading firms to help them kill the proposed joint NASD/Nasdaq trade reporting facility (TRF).

The New York Stock Exchange is trying to form an anti-TRF alliance, which would lobby regulators. The NYSE has also written a talking points memo, which Traders Magazine obtained, outlining what it says are the inherent conflicts of interests of the TRF. Bloomberg Tradebook and Knight Trading Group were among those approached to join the coalition to stop the TRF, industry sources told this publication.

The facility is a key part of Nasdaq's plans to operate as a stock exchange. Nasdaq recently received SEC approval to operate as a stock exchange in January, but has yet to get the go-ahead to establish the TRF.

"They're going to the biggest market makers and anyone else who can help them, asking them to follow their lead," said one trading official who declined to be quoted by name. "These Big Board officials want them to sell the SEC on the idea that the TRF would be damaging to the marketplace and that it would be illegal because Nasdaq is taking credit for trades that don't take place on Nasdaq."

However, NYSE officials, when asked about the coalition and the memo, declined to comment.

The NYSE's goal is that the memo's talking points will turn up in myriad comment letters to the SEC. Some of the highlights of the one-page memo include:

"Urge the SEC to adopt a better market solution: Make the TRF in fact a facility of the NASD, not Nasdaq (or other markets), by requiring that the revenues and trade information generated by the TRF accrue to the NASD rather than other markets. This would permit the separation of the NASD and Nasdaq, consistent with the requirements for Nasdaq to become an exchange."

The TRF will be the subject of a separate filing, the SEC ruled. At press time, an NASD official said the TRF application had yet to be submitted to the SEC. He said it was expected to have been filed during the first week in May.

The NASD spokesman declined comment on the NYSE's would be anti-TRF coalition. Privately, an NYSE official said the Big Board is trying to find out which groups "have the same objections to the plan as we do."

Under the TRF plan, Nasdaq proposes that orders internalized by NASD broker-dealer members, orders that might not have price-time priority, be reported into the TRF.

The new facility would be jointly administered by Nasdaq and the NASD through a limited liability corporation.

The data reported by market makers would then be sold to market data vendors. The revenue received from the sale would go to Nasdaq, which would pay the TRF's operating costs.

Nasdaq would unjustly receive the revenues from the TRF, NYSE officials have complained. These revenues would be used to offer new rebates that would generate more order flow, NYSE officials speculated.

In the memo, NYSE officials suggest that those filing comment letters should emphasize that off-exchange trades can only be reported to a different entity.

"But the TRF is not, in fact, a different entity-it is controlled by Nasdaq and sends the revenues it produces to Nasdaq," the officials added.

NYSE officials also warn market makers that, if the TRF plan is approved by the SEC, it would lead to many exchanges pushing for their own TRFs.

"They will be forced to do that in order to compete with Nasdaq. This would serve no public policy purpose, would give markets credit for trades that don't occur there, and would confuse investors," according to the memo.

Knight, Bloomberg and Nasdaq officials all declined comment.