Nasdaq Trading In Old System
By Susan Harrigan
STAFF WRITER
July 10, 2002
Faced with fierce competition in a stressful business environment, Nasdaq is getting a makeover.
The nation's second-largest stock market, which moved its headquarters to New York City from Washington in April 2001, yesterday unveiled a new trading system that it hopes will help it win back customers from competing businesses known as electronic communications networks, or ECNs. The new system, known as SuperMontage, provides investors with more information about the best prices available, along with speedier trade execution.
SuperMontage, which is scheduled to begin operating July 29, is aimed at plumping up profits for Nasdaq at a crucial time. Under the leadership of its new chairman and chief executive, Hardwick Simmons, Nasdaq is in the process of spinning off from its parent organization, the National Association of Securities Dealers, and plans to go public later this year.
Like many exchanges in Europe, Nasdaq is "demutualizing," or converting from mutually-owned to corporate form, to be able to respond more nimbly to competition, according to Ian Domowitz, a former finance professor at Penn State University who now is a managing director at ITG Inc., a Manhattan brokerage serving institutional investors. The competition, Domowitz said, was created by improvements in technology that "allowed virtually unlimited access to trading," instead of allowing trading to be confined to particular places or membership groups of specialists. "Everybody's re-creating themselves, and learning how to be a business," Domowitz said of stock exchanges in general. "Their mission has changed from serving the public as intermediary to making a profit."
The initial public offering of Nasdaq, a screen-based trading system that doesn't have exchange status yet, will culminate a process that began two years ago. In two private offerings, one for $11 a share and the second for $13, its stock was sold privately to 2,700 investors including member firms, brokerages, and institutions such as mutual funds. Those investors' gains in an IPO - assuming they want to sell - will depend on how the public in general perceives Nasdaq's future earnings prospects.
The present looks fairly grim. Once the hottest market for companies seeking capital and investors seeking big gains, the Nasdaq composite index has lost almost three-quarters of its value during a technology-stock crash that began in the spring of 2000. Due to bankruptcies, delistings and defections to other markets, the number of companies trading their stock on Nasdaq shrank by 20 percent between January 2000 and the end of June 2002. Although average daily trading rose slightly over the same period in terms of shares, it declined by more than two-thirds in terms of dollars, falling from $87.5 billion to $28.9 billion.
In addition to these problems, Nasdaq was subjected to new competition from ECNs, which became popular as online trading exploded in the late 1990s. Such networks anonymously match buy and sell orders, and often are cheaper and faster because they bypass regular exchanges. Currently ECNs handle more than 40 percent of trading in Nasdaq stocks, siphoning off large amounts of transaction fees. Moreover, the ECNs are undergoing a wave of consolidation that will make them even stronger competitors for investors' orders.
Despite laying off nearly 200 of its 1,300 workers last summer, Nasdaq's earnings fell 18.7 percent during the first quarter of 2002. Its efforts to become a global market have achieved limited success. Although it has tried to create electronic market places in Europe and Japan, trading volume hasn't been high. And merger and acquisition talks with major overseas exchanges, including the London Stock Exchange, haven't yet borne fruit.
SuperMontage, which Nasdaq president Richard Ketchum described yesterday as "a seminal event for Nasdaq and the U.S. securities markets," is basically a more elaborate trading screen than the one currently in use. It offers multiple price levels for each stock instead of the best bid and offer, as well as automatic execution, and anonymity for large investors who want to keep their trades from moving the market.
Investors tend to flock to markets that contain the most buyers and sellers, and Nasdaq hopes that SuperMontage will attract so many orders that ECNs will join. But although some small ECNs have agreed to participate, the two largest, Instinet and Island, haven't committed themselves. Those networks, which will merge later this year, together control about 26 percent of trading in Nasdaq stocks.
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