Nasdaq’s Busy Summer

After operating for less than two years, the SuperMontage trading platform is pushing up the daisies following Nasdaq’s decision to focus on a single platform, the Nasdaq Market Center.

Along with the New York Stock Exchange (NYSE)-listed trading system, Computer Assisted Execution System (CAES), the Nasdaq Stock Market pulled the plugs on each of the separate trading platforms in March on the heels of the rollout of its Nasdaq Market Center. The new trading system supports trading of Nasdaq, NYSE and American Exchange (Amex) listed stocks and incorporates Nasdaq’s Automated Confirmation Transaction (ACT) service all on one platform.

"This is the first time that a true market-maker platform with quote management functionality that we offer has been delivered on the listed side," says Chris Concannon, executive vice president of transaction services for Nasdaq. Although there are other platforms out there that offer order entry and management, they are secure order books. "We’re a combination of both, where you have quote management and an order book all combined into the same platform," he says.

The new platform is the first of multiple initiatives that Nasdaq plans to introduce this spring and summer, says Concannon. A few weeks after the launch of Nasdaq Market Center, the electronic stock market also introduced its new closing cross capabilities. Nasdaq is working hand-in-glove with the US Securities and Exchange Commission (SEC) to launch Nasdaq’s opening cross capability later this summer. With the commission’s approval, Nasdaq envisions a trading day starting at 7:30 a.m. EST with pre-market trading, and a 9:30 a.m. opening cross followed by a 4 p.m. closing cross with post-market trading afterwards. (A 9:30 a.m. cross establishes a single price value for a stock for each index at the start of the trading day.)

"We haven’t picked an exact end-time, but the SIP closes at 6:30 p.m. and most of the activity happens between 4 and 5 p.m. and during earnings season," says Concannon.

Nasdaq seems to have woken up an otherwise staid segment of the market. "This is an interesting space right now," says Miranda Mizen, a senior analyst with The TowerGroup. "This launch puts Nasdaq on par with its competitors and makes it better able to compete with the incumbent trading platforms."

The platform’s other bells and whistles include FIX protocol functionality as well as multiple market participant identifiers (MMIDs), which allow individual desks within a firm to manage their own quotes.

Among the major driving forces behind the development of the Nasdaq Market Center was the desire to reduce support costs and improve efficiency, explains Steve Randich, executive vice president and CIO of Nasdaq. "What we did was basically extend SuperMontage to meet the Intermarket Trading System (ITS) requirements," he says.

By retiring the Unisys mainframe that ran the legacy CAES platform and migrating the NYSE listed traffic to the Nasdaq Market Center running on Hewlett Packard’s non-stop platform and Dell servers running Windows, Nasdaq saw an annual seven-figure savings compared to the estimated $1.5 million needed to upgrade SuperMontage to Nasdaq Market Center. "The Unisys mainframe was the most expensive piece of equipment we supported," says Randich.

One of the added benefits of supporting the single trading platform is reduced development and deployment costs associated with new functionality, such as expanded order types. "Pegging and discretion orders are already in the system," says Concannon. He adds that added order-type functionality will follow customer demands and that a number of new quoting orders will be rolled out this month.

Nasdaq’s Randich also expects that Nasdaq users will save on reduced support costs with the new trading platform. "The immediate benefit is that firms now just need to write to one application programming interface (API) instead of two to link to the over-the-counter (OTC) and listed markets," he says.

Industry experts see Nasdaq Market Center’s introduction as a watershed moment for the future of electronic exchanges. "This is the beginning of the next wave of change," observes Mizen. "Nasdaq is pushing very hard into listed trading and multiple other directions. When Nasdaq launched SuperMontage, it underestimated its competitors and the reaction of the marketplace. Since then, it’s spent a year climbing a very steep hill. Now, it has a good as chance as any to succeed."

Nasdaq’s prime competitors, naturally, downplay the new platform’s rollout as a major threat but the normal evolution of electronic trading. "This does not represent a fundamental change in trading for Nasdaq," says Alex Goor, president of the ECN INet. "Nasdaq improved SuperMontage a while ago to trade over-the-counter (OTC) stocks and now it’s extended it to listed stocks." Representatives from The Archipelago Exchange declined to comment due to an IPO quiet period.

The launch of the Nasdaq Market Center in March went smoothly except for a single bug in the match processor, which prevented the listing of a small number of listed stocks for 90 minutes. "The bug was cleaned up that night and things have been smooth ever since," says Concannon. "It affected just a few listed securities and a few customers, not the entire customer base."

So far, the market’s uptake of Nasdaq’s new offering has been relatively subdued, but expected by the electronic stock market. "The activity has been about the same as the CAES system so far," says Cocannon. "We haven’t seen any spikes in the market share, nor did we expect to. We expect that over the next couple of weeks, people will be trying out the system and getting used to the functionality."

The immediate task at hand for Nasdaq is to get its platinum-, silver- and bronze-certified service bureau partners up and running with the new functionality. Nearly all of the platinum-level partners are up and running with the new functionality, but Concannon admits that there are some laggards. "There are still some service bureaus that need to add functionality. We expect by the end of March that they will be fully compliant." Silver and bronze partners have proportionately longer periods to get their respective systems compliant with the new features.

Offering features similar to those of existing trading platforms isn’t a real benefit for Nasdaq, insists TowerGroup’s Mizen. "In order to bring liquidity in, Nasdaq is going to have to offer something different or better. If brokers are looking at two trading destinations that are equal in their capabilities, they will go with the one with the more attractive cost structure," she says.

To grab the attention of trading firms, Nasdaq eliminated all liquidity-removing fees associated with the trading of listed stocks. "We set them at zero back in December and they will stay at zero," say Concannon, who believes it will take a little while for this change to have a noticeable effect on trading liquidity. Instead, Nasdaq expects to make money through increased quote revenue as it plans to increase its overall market share within listed stock trading, which Nasdaq currently claims is 15 percent. Its competitor, INet, also eliminated the same fees late last year.

Will the free trading help drive trading volume to the new system? It may, says TowerGroup’s Mizen, but it also comes with a stiff cost. "Price wars can end in bloodbaths if you don’t have the volume," she says. "If you’re going to have aggressive pricing, you need the necessary volume."