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July 15, 2007

Nasdaq Dealers Under Scrutiny

By Peter Chapman

Nasdaq has begun supplying its issuers with lists of the broker-dealers making the most aggressive markets in their securities.

Under a new program designed for the top brass at its listed companies, Nasdaq is certifying as "select" those market makers whose quotes are nearest to the inside market the most often and who trade the most.

Those firms that make the grade will show up on a list of market makers distributed to issuers every month. The goal is to strengthen the bond between Nasdaq's issuers and the investment banks that serve them.

"The benefit to the issuer," said Brian Hyndman, a senior vice president in Nasdaq's transaction services group, "is that it can truly understand why its stock is trading the way it is. The benefit to the broker-dealer is that it is building a relationship with the issuer community that may generate some banking business."

Nasdaq originally planned to launch the program last September, but scuttled it after taking flak from angry dealers. Nasdaq's original plan called for it to make the data available to order senders as well as issuers.

Dealers objected to that, as well as being prodded by Nasdaq to quote more aggressively. Nasdaq is still seeking better quotes, but will now distribute the data just to issuers, according to Hyndman.

Nasdaq rates the program a boon for market makers as well as issuers. "Many of our issuers are launching buyback programs," Chris Concannon, Nasdaq's head of transaction services, said. "You can get trading business by being a select market maker."

Nasdaq executives observed that they are already seeing an impact in the quality of quotes. Market makers got a first look at the Select list in June, before the issuers. That gave them time to tighten up their spreads and boost their market shares. That is beginning to happen, according to Nasdaq.

"We've had a number of firms tell us they have changed their trading behavior to assure they are a select market maker in a given sector or name," Conncannon said. "The key element is in July and August and September-are they having the conversations we want with our issuer community?"

Communication between issuers and the dealers who support their securities is not unheard of. Companies listing on the New York Stock Exchange typically have relationships with specialists.