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October 14, 2008

Nasdaq's Adam Nunes Discusses ...

By Editorial Staff

Adam Nunes runs Nasdaq's options business. He spoke recently at a press conference and, afterwards, to Traders Magazine.

>On the pressure to reduce fee caps

We're an exchange. We certainly like the autonomy to charge what we think is the appropriate fee, so it is hard for us to be in favor of a cap at all. The same would go for equities. We have seen some interesting movement [from other exchanges].

We've seen some go up and some go down at some of the maker-taker exchanges. But we've held pat. That is all interesting information that we can learn from to determine where we want to be.

>On cries from some brokers to be able to internalize orders

The bigger issue there is insuring that there are competitive quotes in the market. In the equities market, about 75 to 80 percent of volume is matched on an exchange or ECN. Around 20 to 25 percent is internalized.

Now, if you imagine a world where those are flipped, you will have a number of people saying, "Why bother posting aggressive bids and offers? I never get to trade, because it all gets internalized and traded upstairs." So you could hypothesize that spreads would widen out a bit-which would be even better for the internalizers, so they could internalize more. And you would start to see the quality of executions deteriorate. Would that happen in the options world? Would you see the quality of the executions deteriorate? I don't really know. I think you would.

Plus, options are a derivative product. You price them based on the underlying. It would be a somewhat empirical question: Are people going to take more edge out of the market, if they don't need to compete on their options quote, assuming their pricing models are to maintain their effectiveness or integrity? It is also worth pointing out that internalization in equities wasn't the SEC's decision. It was a Congressional act, the Maloney Act of the 1940s.

>On Nasdaq's controversial price-improvement mechanism

We have been working on bringing price improvement to fruition. I am happy to report we have started to see some success on that front. If the minimum price variation (MPV) is a penny, we don't have anything that would be non-displayed inside of that.

We don't really have an opportunity for price improvement in those names. If the MPV is a nickel or a dime, we do accept orders in penny increments. And we have started to see firms using those. Of those executions where the increment is a nickel or a dime, we have seen a little more than half of our executions be price-improved inside that spread. We think that is a great accomplishment. We hope to continue to build on that.

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