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December 18, 2007

Nasdaq's Opening Gambit

By Nina Mehta

Nasdaq's opening and closing auctions, which launched for the market's own securities in 2004, are single-price electronic auctions that also discover price, but without the involvement of specialists. The auction process uses electronic indications to attract contra-side flow when necessary.

Competition has now reached across from the trading day, during which multiple markets compete for orders, to the opening and closelong the bastion of the primary listing venue. "Expanding Nasdaq's automated opening and closing crosses is a logical extension for Nasdaq," says Michael Rosen, senior vice president for product development at institutional broker UNX Inc. "Nasdaq is responding to a market need by offering an alternative."

Nasdaq's foray into exchanges' sacred habitat wasn't taken lightly by the NYSE. On Oct. 31, the NYSE preemptively eliminated its fee for all trades at the opening. Orders that participate in specialists' opening auctions now execute at no charge.

The NYSE and Amex both concede that market participants want stocks to open earlier and want more transparency around the pricing process at the open and close. But both markets stress the importance of hands-on, human-negotiated price discovery at these critical times, which Nasdaq's automated auctions cannot provide. They question the ability of Nasdaq's crosses to produce good, or efficient, prices since the bulk of liquidity is in their markets.

"Clearly the market is moving toward wanting an opening that's faster," says Larry Leibowitz, chief operating officer for U.S. markets at NYSE Euronext. The NYSE, he says, will reduce delays by giving specialists tools to open stocks faster and to disseminate pre-open indicative prices to brokers more efficiently. Since October, specialists have also been able to open stocks automatically on quotes when there is no opening trade.

Big Play

Nasdaq's ambitions are big. "Our intention is to take the volume away from Amex," Concannon says. Nasdaq set its sights on the NYSE's and Amex's openings because delays at 9:30 a.m. occur after a night or weekend when the markets are closed and therefore lack reliable price discoveryand because many retail customers trade in the opening. More trading also occurs at the open than at the close. Snatching volume at that time could thus add precious percentage points to Nasdaq's market share. On most days, a little less than 5 percent of daily volume appears to trade at the open.

In comparison to the open, the close is dominated by institutions. Some institutions, such as index players, insist on trading at the primary market, particularly if they're following indexes and want to eliminate tracking error. That makes closing volume more difficult for Nasdaq to siphon away from other markets.

Steve Swanson, chief executive of Automated Trading Desk, an electronic market-making firm owned by Citi, predicts Amex will lose the opening and close to Nasdaq in the coming months. At a Security Traders Association conference in October in Boca Raton, he said "problems" with Amex's auction process "have begun to wear" on customers.