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Trading Trends Favor Electronic Avenues

Abolishment of trade-through rule would let NYSE rivals compete on price and speed

A potential hit to the New York Stock Exchange could benefit Nasdaq and the Electronic Communications Networks that both cooperate and compete with Nasdaq's SuperMontage order-routing system. The Securities and Exchange Commission in the next month is expected to abolish an archaic rule established 30 years ago, when orders to buy or sell a stock were handled manually. The trade-through rule ensured that users of regional exchanges had access to the best prices, which were usually found on the NYSE--but at a sacrifice of execution speed because NYSE specialists have up to 30 seconds to decide whether to accept an order.

NYSE's competitors say the end of the trade-through rule would lead to participants competing on both price and speed, making it easier for them to attract orders with automated execution systems. Brokers "won't be forced to send orders to a place that can't handle them as quickly or as efficiently as an electronic market," says Alex Goor, president of ECN Instinet Group Inc.'s INET marketplace. "The NYSE will be forced to defend its market share.

John Thain -- Photo by Spencer Platt/Getty Images

NYSE CEO Thain has expanded the Big Board's electronic-trading system to process higher-volume orders.

Photo of John Thain by Spencer Platt/Getty Images
To shore that up, NYSE's new CEO, John Thain, recently expanded the exchange's existing electronic-trading system for rapidly processing low-volume orders to process higher-volume orders. But electronic markets are sharpening their technology platforms, too. In the past year, Nasdaq has enhanced SuperMontage, which was designed to give traders more and better data from multiple parties, including ECNs, to bring it up to the level of platforms used by ECNs themselves. For instance, SuperMontage makes trades anonymous and is compatible with FIX, a protocol for transmitting trade instructions.

At the end of the month, SuperMontage will be linked with CAES, a legacy Nasdaq system that provides quotes from other markets, including NYSE; together they'll create a "unified platform by which you can trade IBM [a NYSE-listed stock] side by side with Dell," a Nasdaq-listed stock, says Chris Concannon, executive VP of Nasdaq transaction services. That's a step toward answering some investment firms' demands for more seamlessly linking trading systems. "If you're going to hold yourself out as a market center, you've got to provide access in a timely fashion," says Andrew Brooks, head equity trader at T. Rowe Price.

Yet SuperMontage has failed to get enough exchanges onboard, says Andy Madoff, co-director of trading at Bernard L. Madoff Investment Securities LLC, which uses its own order-routing system, Superbook. The electronic exchange ArcaEx, for instance, participated briefly in SuperMontage; the company says it used SuperMontage only as an "interim step" while building its own system. SuperMontage's reputed $100 million price tag is "astronomical" compared with what it cost ArcaEx to build its platform, chief technology officer Steve Rubinow says.

Instinet this month will begin participating in SuperMontage, and Nasdaq says that will attract more liquidity. Concannon says Nasdaq's market share, defined in part by the percentage of shares Nasdaq processes, is 55% to 60%; he declined to say how much of that is handled by SuperMontage. The Big Board's share of NYSE-listed stocks' trading volume has hovered around 80%, but it's starting to slip, says Jodi Burns, an analyst at Celent Communications. She says it could quickly drop to 60% or less once the trade-through rule disappears.

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