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April 3, 2008

Nasdaq Prevails in Options

By Peter Chapman

Nasdaq OMX, after a yearlong back-and-forth with the Securities and Exchange Commission, won the regulator's approval for its options market last month.

The effort to establish the Nasdaq Options Market (NOM) was not without its setbacks. Nasdaq initially petitioned the commission for seven order types, including two controversial types. In the end, it got six, forfeiting a "non-displayed" order. Due to complaints from the American Stock Exchange and Citadel Investment Group, which operates one of the largest options market-making firms, Nasdaq dropped its request for the hidden order type.

It managed to hang onto another controversial order type, the "price-improving" order, which allows market participants to quote at increments lower than the legal increment. The order is displayed at the closest legal increment while the actual price is hidden from view. In other words, if an option trades in nickel increments, a quote might be $1.05 to $1.10. The price-improving order could be priced at $1.09, but display at $1.10.

NOM was expected to launch at the end of last month.

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