Nasdaq said the SEC's adoption earlier this year of rules for a national market system, known as Reg NMS, cleared the way for its withdrawal from ITS, which was established in an era when most trades were executed manually by floor-based traders.
Reg NMS prohibits an exchange from discriminating against nonmembers that attempt to access quotations through a member of the exchange. In the case of Nasdaq, the rule means that it can obtain quotations through Brut LLC, an electronic trading network that Nasdaq acquired last year and that's a NYSE member. "The market-access provisions of Reg NMS replace any need for an intermarket linkage like ITS," says Chris Concannon, Nasdaq's executive VP of transaction services.
Nasdaq's withdrawal from ITS underscores its view that private, high-speed electronic linkages between market participants eliminate the need for a single intermarket linkage. "In Nasdaq, there are no ITSes; there are only proprietary, high-speed linkages and routing technologies," Concannon says. "We envision that same network will be applicable in the NYSE-listed world."
Nasdaq's exchange-listed product, which combines Nasdaq's order-matching facilities with Brut's order-routing technology, now handles 5% of NYSE-listed trading; Nasdaq's overall share of trading in NYSE-listed securities is 19%.
Reg NMS also includes an "order protection rule" requiring exchanges to adopt rules preventing the execution of trades at prices inferior to quotations on other exchanges, as long as those quotations are immediately and automatically accessible. ITS has its own rule protecting orders for NYSE-listed stocks, known as the trade-through rule.
"Prior to NMS, the incentive for belonging to ITS was that NYSE-listed orders were protected," says Adam Sussman, senior consultant at the Tabb Group, a financial-services consulting firm. "With NMS, all orders are protected, so one of the major benefits of ITS disappears."