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May 25, 2007

The Dark Likes Nasdaq

By Nina Mehta

Nasdaq may have delayed its intraday crossing sessions until later this year, but there's already a "massive amount of dark liquidity in our market," said the exchange's executive vice president, Chris Concannon, at a recent Security Traders Association of New York meeting.

Currently, "15 to 18 percent of [Nasdaq's] executed liquidity is non-displayed," Concannon said. "Limit orders are disappearing." Customers are making ample use of Nasdaq's non-displayed order types, such as the dark version of its midpoint peg, which pegs an order to the midpoint of the national best bid and offer without displaying it publicly.

The appeal of dark order types is just one sign that execution and routing strategies are becoming more important under Regulation NMS, Concannon said. "It's not enough to just run a matching engine," he told the gathered traders and industry execs. An exchange must "add value beyond trading a 100-share order quickly and cheaply." Concannon said Nasdaq's effort to source liquidity includes "order types that route to every liquidity pool [and] order types with different behaviors."

Philadelphia Stock Exchange chairman and CEO Meyer "Sandy" Frucher noted that the Securities and Exchange Commission's Division of Market Regulation may be watching the explosion of non-displayed liquidity in the markets with some concern. "They wanted transparency [with Reg NMS] and got opaqueness," he said. "There could be a rebound effect in Washington."