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Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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June 18, 2008

Primary Market Still Guides Open

By James Ramage

Most traders are filling their customers' orders in New York Stock Exchange-listed securities at the NYSE's opening price--not Nasdaq's.

Since it began opening in NYSE stocks last July, Nasdaq OMX so far has gained almost a 5 percent market share at the opening. So when there are two prices to choose from for morning orders that arrive prior to 9:30 a.m., traders have been going where the volume is.

"I would say that most people are sticking with the primary opening, which has more volume," said Mark Madoff, director of trading at Madoff Investment Securities. "More volume will tend to lead to a more efficient and truer opening."

The NYSE has gone far to address the latency issues associated with its opening process, said Leonard Amoruso, general council at Knight Capital Group. The wholesaler has noticed how the Big Board has become more electronic and developed more efficient order handling processes over the past several months.

"It still has the lion's share of the liquidity," Amoruso said. "We haven't seen the customer demand for a move away from the NYSE opening."

For its part, Nasdaq said the competition will ultimately make the NYSE more efficient. At present, though, Nasdaq senior vice president Brian Hyndman argues that his exchange's opening cross is "more efficient and timely and more transparent than that of the Amex and the NYSE."

He predicted that Nasdaq will gain NYSE-listed market share with time. He claims Nasdaq's more sophisticated customers do not have a problem with different opening prices, and they will, in turn, convince their clients of Nasdaq's advantages.

"Firms are starting out with some of the more liquid stocks in the NYSE names," Hyndman said. "We want to try to build up critical mass [in those] and move on to another set of securities."

Concerns over the dual opening were brought to light by a recent Security Traders Associationreport on market structure that recommended the NYSE and Nasdaq coordinate their opening processes. Peter Driscoll, a senior equity trader at the Northern Trust Company who also contributed to the STA study, suggested the two exchanges find a way to interact prior to the opening that would offset their price imbalances.

Wholesale market makers such as Madoff and Amoruso said the STA's recommendation probably isn't the right solution. The exchanges should remain competitors in the process for opening in NYSE-listed names, Madoff said.

"On an academic level, there's certainly an appeal to [the STA's recommendation]," Amoruso added. "But we're hearing that our clients and other industry participants are both satisfied with how the process is working today."

The STA, for its part, has not called for any changes. John Giesea, STA president and chief executive, told Traders Magazine last month that it wants to canvass the industry for opinions and to develop guidelines for an improved process at the opening, based upon input.

The Securities and Exchange Commission has said that the dual openings haven't been brought to its attention as being aproblem.

Before last summer, when Nasdaq extended its electronic automated auction process to non-Nasdaq names, the primary listing market had always opened trading in its stocks. However, since then, there have usually been two different opening prices in Big Board stocks.

Proponents for the dual openings said the competition presents more opportunities for price improvement. They also compel the NYSE to keep pace with demands for efficiency and advances in its technology.

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