Richard G. Ketchum, Nasdaq’s president commented, "After months of proposals and reactions, I think we now have a breakthrough proposal. We have preserved for investors the benefits of SuperMontageSM, while addressing issues raised by certain ECNs and others. We will soon be submitting a revised proposal to the SEC and urge all parties to review it closely."
"Breakthrough Proposal"
An outline of the nine elements of a revised SuperMontage proposal is attached. These modifications have been reviewed in a preliminary way with a cross section of market participants (i.e. Market Makers, ECNs, and buy-side institutions). Their response to date has been positive, even among some that had previously been critical of SuperMontage.
Many of the modifications are structural and technical, and require an in-depth knowledge of the system to understand. One issue that has been written about, and an issue that this new proposal addresses, is how the system proposes to handle ECN access fees (fees charged to users by ECNs for accessing their customers’ orders). Proponents of the prior proposal argued that ECN access fees represented an added cost to the price of a security and thus their quotes should be ranked accordingly, with the fee included in the quote. Certain ECNs argued that the inclusion of their fees in the price put them at a competitive disadvantage and that their quotes should be displayed without the fee included.
To address these diametrically opposing views, Nasdaq® will be proposing to give users of SuperMontage a choice in how prices are treated. With a click of a mouse, users of SuperMontage will be able to enter orders to access prices with or without regard to access fees. This solution gives the market participants using the system control over how this matter is handled. Ketchum noted, "This is a fair resolution to this issue. It is hard to argue with letting the market decide."
Bloomberg Tradebook Announces Support
Bloomberg Tradebook, LLC, is a major ECN averaging more than 92 million shares traded daily. Tradebook has been an active participant in the debate over the SuperMontage proposal and has reviewed, in a preliminary way, the proposed modifications.
Commenting on the proposed changes, Kevin Foley, Bloomberg Tradebook’s chairman and CEO, said, "With the modifications on the table, we are now prepared to be fully supportive of the proposal. The modifications being considered seem to be a fair resolution to what has been a difficult set of issues. SuperMontage, if implemented along the lines envisioned, will be a dramatic enhancement for investors and all market participants."
Next Steps
Nasdaq is currently preparing an amendment to its SuperMontage proposal and will forward it to the Securities and Exchange Commission (SEC) shortly. This amendment will detail the choices to be provided to SuperMontage users as well as several other modifications that respond to topics raised by both ECNs and some institutional users (buy-side) of the SuperMontage, in the comment period just concluded.
Background Description of the SuperMontage Proposal
SuperMontage is the proposed successor to Nasdaq’s current trading system. The proposal was originally submitted to the Securities and Exchange Commission (SEC) on October 1, 1999, and published for comment on December 6, 1999. Since that first comment period there have been two additional comment periods, thus making three in total. Nasdaq has worked with all interested parties and the SEC and has modified its proposal through seven amendments to respond to the issues raised. The new system will give investors a better understanding of the supply and demand for trading a stock by showing the total number of shares available at the three best prices. SuperMontage will also provide a mechanism for trading more quickly and efficiently. By substantially increasing the information available to investors and improving trade executions, it will continue to drive down the cost of trading. The advantages of SuperMontage over the current system are summarized below:
Nasdaq’s current technology allows investors to see the trading interest at only one price level, i.e., the best price to buy and to sell a stock. While investors can see some buying and selling interest below that price, it is incomplete. This is because broker/dealers can only display one price at a time. SuperMontage will give investors a better snapshot of the supply and demand for trading a stock by showing the total number of shares available at the three best prices. Greater information (transparency) will allow investors to make better informed decisions about whether to buy or sell a stock.
Nasdaq’s current execution systems are not fully integrated and do not allow investors to access trading interest from multiple sources easily. SuperMontage corrects these inefficiencies. Through innovations in technology, it allows investors to access trading interest at multiple prices from many different sources. The system will give investors many choices as to how to do this. This advantage will be especially valuable to investors as the industry moves to a decimal-based trading environment. The Nasdaq Stock Market lists nearly 5,000 companies, has a larger dollar volume, and trades more shares per day than any other U.S. market. Nasdaq is a subsidiary of the National Association of Securities Dealers, Inc. (NASD®), the largest securities-industry, self-regulatory organization in the United States. For more information about Nasdaq, visit the Nasdaq Web site at www.nasdaq.com or the Nasdaq NewsroomSM at www.nasdaqnews.com.
Draft Revisions to Nasdaq SuperMontage Proposal
2. Choice: Rather than determining a particular priority sequence, that would be perceived as favoring either Market Makers or ECNs (which have the ability to charge access fees), Nasdaq will provide entities entering orders a choice of priority sequences. Further, entities can choose to enter orders directed to a particular ECN or Market Maker.
3. Transparency: Nasdaq intends to build a data feed to level the playing field between Nasdaq and its market participants, which will make available the information that underlies what is displayed and accessible through SuperMontage sweeps.
4. Time Priority Protection for Quotes and Orders: Any ECN or Market Maker that adds an order, increasing the size of its displayed quote or order, will maintain its place in time priority. The augmented portion will fall to its appropriate time priority based on its entry time.
5. Reserve Size: In providing reserve size functionality to both ECNs and Market Makers through SuperMontage, Nasdaq necessarily gains access to the identity of the entity entering the reserve size and the size of the order. Nasdaq commits that it will not use this information to provide optimized reserve access using this information, which is not available to all participants.
6. Order Delivery Risk: To maintain market continuity, Nasdaq must designate a time interval after which an ECN is passed by, following the sending of a marketable order against its bid or offer. Nasdaq will lower the risk to the ECN of such an occurrence, by increasing the total time interval (including both Nasdaq and ECN processing) from seven seconds to thirty seconds. It can do so because it will designate a separately measured five-second interval, exclusively for the ECN’s turnaround time.
7. Information Regarding Entity Sending an Order: The SEC has allowed ECNs to refuse to provide liquidity to entities that do not pay their access fees. Accordingly, SuperMontage will include the sender’s identity. For fairness, the information will be included for both ECNs and Market Makers.
8. No Advantage to SuperMontage for Unexecuted Marketable Limit Orders: In the previous filing, unexecuted marketable limit orders that had been entered by an order entry firm remained in the system in expectation of possible execution for ninety seconds, thereby encouraging use of SuperMontage relative to a particular market participant. With this amendment, such orders will be canceled if not immediately filled.
9. Work to Resolve UTP Issues: Nasdaq acknowledges that additional progress still may be possible with respect to the priority ranking of UTP proprietary trading interest, and we are committed to working with interested parties to develop a workable solution.
