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February 16, 2009

New Kid on Clearing Block

Nasdaq plans to take on DTCC with a low-cost service

By Gregory Bresiger

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Brokerages are paying too much to the industry utility to clear cash equity trades. That will be Nasdaq's argument to shareholders and clients as it gears up in the domestic market to become a major player in the clearing business. That means it will bump heads with the Depository Trust and Clearing Corp. (DTCC) and its subsidiaries.

"We can offer lower costs to our customers," says Brian Hyndman, senior vice president of transaction services for Nasdaq. He adds that Nasdaq will only do clearing. It will not settle trades.

Trading costs have declined in the United States for years, but the clearing tariff is still too high, Nasdaq officials contend.

"On average, we're going to reduce the Street costs of clearing by 50 percent," Hyndman says.

Those are numbers that DTCC vigorously disputes. It also says Nasdaq doesn't have its expertise in key areas of clearing.

Nasdaq already is selling clearing services in Europe, where it contends that it is lowering excessive costs.

Still, that's an argument that will be debated in the United States by DTCC and its various subsidiaries, such as the National Securities Clearing Corp. (NSCC).

DTCC and its subsidiaries have had a virtual monopoly on the clearing business since the late 1970s. They provide clearing, settlement and information services for various financial instruments.

Critics say Nasdaq is looking at clearing in the U.S. because many of its lines have been disappointing. Nasdaq announced it was buying the Boston Stock Exchange in 2007. It closed the deal last year. The Boston had retained its clearing license for cash equities.

Clearing trades calls for a central counterparty to act as a buyer and seller for every trade. It is potentially a big source of profit for efficient exchanges with in-house clearing operations.

"We see great opportunity in clearing," Robert Greifeld, CEO of Nasdaq OMX, told a recent conference.

Indeed, Nasdaq, pending regulatory approval, is scheduled to launch its Nasdaq Clearing Corp. group in the third quarter.

Will brokerages-now longtime clients of DTCC/NSCC-use Nasdaq Clearing Corp.?

Several trading officials gave Traders Magazine mixed answers. Some say Nasdaq will fail. Others will give Nasdaq a look. That's provided it can undercut competitors. In principle, most traders endorse Nasdaq's entrance into the clearing business.

"I think more competition in clearing is a generally a good thing," says Randy Williams, vice president of sales for BATS, a Kansas City-based exchange.

Williams says BATS would consider using Nasdaq, even though it is an exchange competitor.

He contends that clearing services today are overpriced. NSCC argues, though, that its average of 66 thousandths of a cent ($0.00066) per 100 shares for clearing services is very reasonable.

BATS now uses the New York Stock Exchange's trade reporting facility (TRF), but Williams stresses that BATS is always shopping around for the best deal. Another trading official agrees.

"I will certainly tell my clearer to investigate if the Nasdaq Clearing Corp. offers us a better deal," the brokerage executive says. His firm now uses Goldman Sachs, a giant brokerage that self-clears, clears for others and uses the industry utility. The executive, who didn't want to be quoted by name, says costs are so important today that "any chance to save money must be examined."