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September 12, 2006

Nasdaq's Long Hard Road to Gain Stock Exchange Approval

By Gregory Bresiger

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  • Nasdaq's Long Hard Road to Gain Stock Exchange Approval

After some six years of regulatory stops and starts, the Nasdaq Stock Exchange is finally scheduled to begin operating this month. Nasdaq's exchange application was approved in January, but the Securities and Exchange Commission stipulated a number of conditions before it could actually go ahead with operations. This included approval of a trade reporting facility (TRF) through a limited liability corporation and integration of its INET, Brut and SuperMontage trading platforms.

Nasdaq has always operated under the NASD as a national securities association. It is now approved by the SEC as a national securities exchange.

Nasdaq's plan was to be operational as an exchange in Nasdaq-listed issues on August 1, Nasdaq officials said. The second step in the exchange rollout would be trading in other exchange-listed securities beginning in September.

The approval came just a few weeks before the SEC also gave the green light to Nasdaq to merge its three trading platforms. Nasdaq officials said the single book will provide improved execution rates and quicker fills.

Exchange registration allows Nasdaq to operate independently of its one-time parent, the NASD. Now that Nasdaq is a securities exchange, it will change its corporate form. Nasdaq, in its previous form, the Nasdaq Stock Market Inc, will become a holding company. It will contain a newly formed subsidiary, the Nasdaq Stock Market LLC.

As an SRO, Nasdaq will have its own rules governing trading, membership and regulation. It will also have the authority to interpret those rules.

Nasdaq got its way, but now its competitors are gunning for it.

Despite opposition from the New York Stock Exchange and other exchanges, Nasdaq and the NASD managed to convince the Securities and Exchange Commission to approve their jointly operated TRF.

More TRFs

The new facility was deemed under the control of the NASD and not Nasdaq by the SEC, which permits Nasdaq to benefit monetarily from the trade reporting fees paid by broker-dealers that internalize, or trade against, customer orders. Simply as a traditional exchange, which Nasdaq became earlier this year, it would not be allowed to do so.

Yet in approving the NASD/Nasdaq partnership, the SEC opened the door for other exchanges to set up their own TRFs with the NASD, possibly providing Nasdaq with some competition.

The New York, the Chicago and the National, are lining up to start their own TRFs with the NASD.

NYSE officials, conceding that Nasdaq got most of what it wanted in the much-debated plan, said now they will look at ways of "displacing" Nasdaq as the conduit for processing off-exchange prints. This means NYSE is also exploring its own TRF, said one Big Board official.

"While we continue to believe that internalization of retail orders is inconsistent with good public policy, we recognize the benefits often derived from block facilitation trades in reducing market impact costs and so we will assess the most practical way to adapt to the TRF's approval by broadening our processing services," said Robert McSweeney, senior vice president, competitive position, NYSE,

And McSweeney noted that all off-exchange print business is now up for grabs. Thirty percent of volume reported by Nasdaq in its listed stocks and 15 percent by Nasdaq in NYSE stocks will be "available for TRF processing," he noted.

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