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August 9, 2006

TRF Application Process Slows

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A plan by the NASD and Nasdaq to create a jointly-held trade reporting facility (TRF), which would allow Nasdaq to operate as an exchange, has been held up.

Slowing the process are complaints by Nasdaq's competitors-certain exchanges- that the nature and amount of the monies Nasdaq is to pay to activate the TRF are inappropriate.

These exchanges also want to create TRFs with the NASD. They are arguing for a lower-cost payment structure than the one Nasdaq has proposed. That has the regulators in a quandary as they try to decide on the best payment structure.

The TRF is a critical component of Nasdaq's bid to operate as a stock exchange as it would allow Nasdaq to continue to profit from broker-dealers' internalized trades. Securities and Exchange Commission approval is necessary, but is on hold until a value can be put on the TRF.

At issue is a fair startup price for the TRF. Regulators are trying to hammer out an agreeable price for the various exchanges looking to have their own TRFs, two sources told Traders Magazine. Nasdaq wants one price. The exchanges want a lower price. And that is why the TRF application process has slowed over the past month.

"They're arguing over start-up pricing and whether regional exchanges using the TRFs should pay a big upfront cost to the NASD or should each exchange be assessed on a pay-as-you-go basis," said an ECN official with knowledge of the negotiations. This trading executive also said the regional exchanges are balking at a high six-figure or low seven-figure entrance fee. They would rather have a small entrance fee and pay for their TRFs on a pay-as-you-go basis.

"But Nasdaq is taking the position that they have already sunk a lot of money into their TRF plan and others should also have to pay the same," said another trading executive familiar with the negotiations. He added that ECNs would also like to have their own TRFs because it "would allow them to trade economically."

Despite Nasdaq's insistence that it would complete its exchange application this summer with SEC approval of the TRF, the actual application had not been filed by the NASD at presstime. Several officials of other exchanges, including the National Stock Exchange (NSX) and the Chicago Stock Exchange, have also indicated they intend to file for their own TRFs, a project that must be done in coordination with the NASD.

An NSX official declined to elaborate on the particulars of its negotiations with the SEC, other than to say "we're close" to an agreement. Chicago Stock Exchange officials also declined comment as did an NASD official. Two sources predicted that Nasdaq's TRF application ultimately will be approved. But, as with its long running exchange application, it will likely take longer than originally expected, they said. Nasdaq officials declined comment.