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July 5, 2006

Thain: ACT Holds Industry Captive

By Gregory Bresiger

The New York Stock Exchange is asking the Securities and Exchange Commission to open up Nasdaq's ACT trade reporting facility to other exchanges if it decides to approve the Nasdaq/NASD Trade Reporting Facility (TRF) plan.

In a letter to SEC Chairman Christopher Cox, NYSE chief executive John Thain reiterated the Big Board's position that the financial arrangement between the NASD and Nasdaq related to the proposed Trade Reporting Facility (TRF) was bad policy. But, in the event the SEC approved it, the NYSE wants the SEC to force Nasdaq to convert its proprietary Automated Confirmation Transaction Service (ACT) into an industry utility.

If that did not occur, Thain said Nasdaq would have "an unfair competitive advantage over every other market participant that produces market data." Thain claims Nasdaq has been asked for equal access to ACT, but has been denied it. The issue is one of desktop real estate. If the NASD/Nasdaq TRF is approved, the SEC will likely allow all other exchanges to establish TRFs with the NASD. (The proposed TRF is a legal entity to which market makers will report their internalized trades, paying Nasdaq for the privilege.) For those arrangements to work, however, the exchanges would have to make it easy for market makers to report their trades.

Now they use the ACT service to do so. They may not want to install a software program for every exchange's TRF into which they report. The shortage of space on their computer screens could deter them from installing new software and reporting their trades to other exchanges.

"ACT is an industry utility that holds broker terminal real estate captive," Thain wrote. "Unless Nasdaq's competitors have equal access to both ACT and the NASD/Nasdaq Trade Reporting Facility, the revenue they generate will continue to go to Nasdaq."

Nevertheless, Robert Glauber, chairman and chief executive officer of the NASD, also wrote to Cox to clear up "the inaccuracies" and "confusion" from the Thain letter. Glauber said that Thain's complaints about ACT are "not relevant in any way to the TRF discussion." At presstime, the NASD had yet to file the TRF plan. But filing is expected soon, according to a NASD spokesman.