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July 11, 2011

Nasdaq Woos Dealers

By Peter Chapman

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Nasdaq OMX plans to make it easier for market makers to publish quotes on its Nasdaq Options Market by giving them technology they already use on sister exchange Nasdaq OMX PHLX. At the same time, the exchange operator will expand and tighten market makers' quoting requirements.

"This will attract new liquidity from market makers who previously weren't posting two-sided markets," Ellen Greene, a vice president in Nasdaq's transaction services group, told Traders Magazine. The changes are slated to become effective in the third quarter, pending approval from the Securities and Exchange Commission.

Many of the market makers expected to start quoting on NOM are already quoting on Philly, said Tom Wittman, a Nasdaq senior vice president in charge of U.S. options markets. These firms also may be representing customer limit orders on NOM.

Nasdaq's homegrown options exchange is one of the smallest, with a market share of about 5 percent. The exchange operator is treating the upgrade as a major event, dubbing it "NOM 2.0." By introducing more quoting, Nasdaq hopes to generate more trading and therefore boost market share. Nasdaq's approach is one of carrot and stick.

To entice market makers to quote on NOM, Nasdaq is incorporating three key pieces of technology into the exchange. First, it will make available the same quoting interface market makers use on the PHLX, making it easier for them to quote on both markets. Importantly, this allows dealers to quote in bulk, transmitting hundreds, thousands or even tens of thousands of quotes at a time.

Second, Nasdaq will give market makers the same risk management technology it supplies on PHLX, making it easier for them to pull out of the market if necessary. Finally, NOM's market data interface will be similar to the Philly's.

To a large extent, NOM 2.0 represents an integration of the exchange with the Philly. "A market maker will have models that send quotes into the Philly," Wittman explained. "But he doesn't have the ability to use that same model to send quotes into NOM. So we're going to give them that ability."

If market makers do decide to quote on NOM, they will find greater requirements than before. Most important, market makers will be required to quote by class, not by series. That means, for instance, they must quote all IBM calls and puts, not just the June 170 calls and puts, for example, as they do now. Heretofore, what little market making was done on NOM was typically done in front-month options in no more than three or four strikes, Wittman said. Nasdaq also plans to limit spread widths to $5. Currently, market makers can quote bids and offers as far apart as they like.