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June 1, 2012

Something Borrowed

By Peter Chapman

Nasdaq OMX Group will launch a new options exchange this month, which will start out life as a carbon copy of the exchange operator's Nasdaq Options Market, but will eventually be recast as a more dealer-centric exchange. The new Nasdaq OMX Bx will be Nasdaq's third exchange, offering services that position it somewhere between NOM and Nasdaq OMX Phlx.

At first, order allocation on Bx will mirror that of NOM. Orders will be allocated on a first-come, first served basis. Later this year, Nasdaq will drop time priority on some options and institute pro rata allocation with customer priority to appeal to dealers. Still later, Bx will offer a directed order program for market makers in certain options. Such programs allow dealers to actively solicit orders from retail brokers.

The changes will likely position Bx somewhere between Phlx and NOM. Allocations at the Philly are done strictly on a pro rata basis, while allocations at NOM are based on time priority.

Pricing on Bx, according to published reports, is to be "taker-maker." Liquidity suppliers will pay to trade. Liquidity takers will receive a rebate. This differs from both NOM and Phlx. NOM is a maker/taker exchange. Pricing at the Philly is a mix of standard fees and maker/taker.

To make it even more popular with dealers, Nasdaq will allow bulk quoting through the same facility that dealers use to quote on the Philly and NOM. That has proved popular on NOM, which was retrofitted for bulk quoting only last year.

That change, as well as new pricing, has made NOM more popular with market makers. "In the past year, at NOM, we doubled the number of market makers and grew our market share from 4.2 percent to over 6 percent," Stacey Cunningham, a managing director in Nasdaq's transaction services division, told the crowd at this year's Options Industry Conference in New Orleans. "On some days it touches 7 percent." Bx is expected to launch at the end of June.

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