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July 15, 2007

Nasdaq Aims for More Listed Share

By Nina Mehta

Nasdaq isn't content to slowly siphon away New York Stock Exchange-listed volume during the trading day. It wants a share of the opening and closing volume as well.

In July Nasdaq will extend its electronic opening and closing auctions for Nasdaq-listed securities to NYSE and American Stock Exchange-listed names. The goal is to provide "a useful, tradable, robust opening and closing price for all securities," Nasdaq told the Securities and Exchange Commission. The NYSE and Amex use specialists to open and close their stocks.

Client demand is apparently behind the change. "Customers told us if we built it, they would come," said Brian Hyndman, senior vice president for Nasdaq transaction services. He added that Nasdaq waited to extend the auctions until it had a certain level of matched volume in NYSE-listed stocks.

Nasdaq also expects to draw volume from Amex, since it transacts more than the primary market in some exchange-traded funds, said Adam Nunes, vice president for Nasdaq transaction services.

Nasdaq currently trades about 40 million shares per day at the open and close-2 percent of its average daily volume in Nasdaq-listed names.

The opening cross is largely a retail-oriented price discovery forum, according to market participants, although volume-weighted-average-price traders also participate. Institutions frequently hold back to see how a stock's price opens before committing to a price. In contrast, the closing cross is used primarily by institutions, especially mutual funds that need to get the closing price for stocks.

Nasdaq is after more than just opening and closing volume. Customers that see liquidity at an exchange at the open are like to return for volume, Hyndman said. Those that send on-open orders that don't execute are also likely to leave them on that exchange's book.

"If you build volume early at an exchange, it will remain over the day," agreed Diego Perfumo, an analyst at Equity Research Desk, a research and consulting firm. But building that initial liquidity involves more than just possessing the "right ingredients," he said. Traders must still decide to make the switch and move their orders to another exchange.

Nasdaq's effort to grab market share this way is likely to be an uphill battle. "Nasdaq might get a bit of volume at the open and close," said Doug Atkin, CEO of Majestic Research, a research firm that covers exchanges. "I'd be surprised if it gets a lot, but if it does, New York will just mimic the process and technology, and will get all the volume back."

Atkin said the NYSE could use NYSE Arca's electronic opening and closing auction mechanism. The NYSE declined to comment.