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January 2, 2007

NYSE-Nasdaq Battle Over Listed Flow Gets Rough

By Nina Mehta

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The New York Stock Exchange's dramatic reconfiguration of its pricing structure last summer proved to be a boon for Nasdaq. The all-electronic market, using an aggressive pricing scheme, captured the listed business of more than 150 broker-dealers fleeing significantly higher prices at the New York. Nasdaq now sends a half-billion shares to the NYSE every day, up from 200 million per day in the first quarter of this year. Nasdaq's broker-dealer subsidiary is the Big Board's biggest liquidity provider, shipping the exchange almost twice as many shares as does

Merrill Lynch, the second-biggest NYSE broker.

But this summer's drama may prove to be only the first act in a longer play. The Big Board's pricing move, its first major change in decades, is looking more and more like an opening volley. Subsequent tweaks and the expectation of more change suggest that Nasdaq's advantage may not last.

Currently, Nasdaq routes more than 20 percent of its daily captured order flow non-stop to the NYSE. The remaining 400 million shares first pass over Nasdaq's order book. That has increased Nasdaq's matched market share for NYSE-listed equities to 13.4 percent in October, up from 10.8 percent in July, before the New York's new pricing went into effect. That figure was 5.7 percent in October 2005.

NYSE Group's market share for NYSE-listed trading was 69.2 percent in October, down from 78.6 percent a year earlier. It was 72.6 percent in July.

Fee Caps

But Nasdaq's ability to profit at the NYSE's expense may be short-lived. Nasdaq benefited from the NYSE's August elimination of one fee cap for customers and its adjustment of another. The NYSE can-and, some industry observers say, will-soon change its pricing to counter Nasdaq's belligerent forays onto its turf.

At issue is the NYSE's current $750,000 monthly cap for big brokers' transaction fees. The cap has enabled some of the exchange's largest member firms, including Nasdaq, to provide cheap NYSE access to smaller firms that don't meet the cap.

Observers now anticipate that the NYSE will eliminate the $750,000 cap and alter its pricing. That would prevent NYSE's competitors and customers from grabbing orders before they reach the exchange and potentially executing against them. These large firms could wind up paying significantly more without the cap, but the exchange is likely to take measures to lessen their pain, perhaps by lowering or tiering certain transaction fees. The exchange could also institute different pricing for liquidity takers and liquidity providers, which is currently not the case. In mid-November, rumors about the elimination of the cap had increased on the NYSE floor.

Richard Rosenblatt, founder and CEO of agency broker Rosenblatt Securities, says the NYSE Group "is finally getting its pricing right-and it's only a matter of time before the dollar cap disappears." His firm has had an NYSE floor operation since 1979 and has traded Nasdaq stocks upstairs since the mid-'80s.

"For the first time in a while, we think the NYSE could gain back market share," Rosenblatt says.

New York's Gamble