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December 18, 2007

Nasdaq's Opening Gambit

Nasdaq Looks to Loosen the Reigns on Listed Openings

By Nina Mehta

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What Regulation NMS didn't kill, Nasdaq just might. The Securities and Exchange Commission's new trade-through rule has largely neutered the specialists at the New York and American stock exchanges. However, it left their role in managing stock openings untouched. While most trading at these exchanges is now done automatically, openings are still handled by specialists the old-fashioned way.

Nasdaq hopes to change that. Taking advantage of complaints leveled against the New York and Amex over the slowness of their opening processes, Nasdaq has begun soliciting NYSE and Amex order flow from broker-dealers for its opening cross.

"At both NYSE and Amex, orders at 9:30 a.m. are still sitting there at the so-called primary market," says Chris Concannon, executive vice president for transaction services at Nasdaq. "That's frustrating for the retail investor. We have order flow that wants to open at 9:30 on the nose."

Nasdaq last month expanded its automated opening and closing auctions to 5,000 NYSE and Amex names. Nasdaq began testing the waters in July when it added seven active Amex-listed exchange-traded funds to its crosses.

Human Negotiation

Specialists open their stocks by gathering buy and sell interest from floor brokers, institutions and orders in their book to "discover" the best price that will meet the supply and demand. They may commit capital and negotiate with brokers to facilitate this process. When a stock is going to open away from the previous night's close, or has amassed a large imbalance in orders, they publish repeated indications of the likely opening price to solicit contra-side flow. That helps them try to dampen volatility at the open.