The National Association of Securities Dealers may have a tough time convincing traders that its proposed integrated order-delivery and execution platform suits them. But one of the NASD's top officials, Rick Ketchum, is trying very hard.
"We're going to look at a means to pass on the execution-fee income of the book to the market makers themselves," said Ketchum, referring to the voluntary limit-order book and order-delivery system that would replace SOES and SelectNet. "We think the book should be designed in a way that's a benefit to the market makers."
Nasdaq Blueprint
In an interview at the NASD's Washington headquarters, and in follow-up telephone conversations, Ketchum laid out Nasdaq's blueprint for the proposed trading platform, originally dubbed Next Nasdaq, and boldly dismissed suggestions that the NASD is seeking competition with market makers. Aside from the commissions market makers could charge for executions via the limit-order book, Ketchum repeated that there could be profit-sharing arrangements in store.
"We don't want to design this in a way that it is competing against our members," said Ketchum, chief operating officer at the NASD. "[As the facilities processor] we want to pass through the execution-fee income to market makers who are stepping up and providing liquidity in the market." Ketchum did not elaborate, except to say the NASD is "tossing around" several ideas.
The proposed Nasdaq system's greatness, Ketchum continued, is that "investors can control their orders, and at the same time, market makers can have a central and unique place that encourages liquidity in the market. We'll never do anything to jeopardize that. We don't think the book does."
OptiMark
The original interview took on dramatic new life as soon as the NASD announced an agreement in principle between Nasdaq and OptiMark Technologies. The plan aims to integrate OptiMark with Nasdaq's trading platform and planned limit-order book.
Ketchum acknowledged, however, that plans for the limit-order book and the OptiMark plan are not foregone conclusions. "[OptiMark] is not a done deal," he said. "It is an agreement in principle."
Nevertheless, Kethum believed that a large group of NASD members supported the limit-order book, another large group opposed the book, and a third was sitting on the sidelines.
"Our main effort is going to be to get out there and answer their questions," Ketchum said. "We're continuing to look at a variety of questions with respect to our book, and we'll use the notice and comment period as a means to try to respond to legitimate concerns."
A prominent critic of the NASD's plan, Bernard L. Madoff, who chairs the Securities Industry Association's Trading Committee, contends that the current NASD proposal would create a system that competes with market makers.
Under an alternative plan proposed by the SIA Trading Committee, limit orders would come into Nasdaq and then be rerouted to market makers on a rotating basis. Nasdaq's limit-order book would serve as a fail-safe system, and display any limit orders market makers were unwilling to display. Market makers would receive a fee for putting the limit orders in their quotes.
Ketchum said the NASD is continuing talks with the SIA's Trading Committee, and will present the SIA's trading-platform proposal to Nasdaq's Quality of Markets Committee. That may just be a pro-forma move. "It is our judgment that the limit-order book provides the level of benefits to investors that justifies our moving forward," Ketchum said.
Conciliatory
Ketchum struck a conciliatory tone, singling Madoff for praise. Madoff has been "the most effective competitor to the New York Stock Exchange…in the history of listed trading," he said.
"Madoff and his firm are perfect examples of how market makers can provide value-added over a limit-order book, and why they will continue to flourish in this environment," Ketchum added.
The NASD does not envision significant costs for firms if the proposed Nasdaq trading platform is approved by the Securities and Exchange Commission. Current workstations would be used. The limit-order book would be called up as a separate page like any other electronic communications network when it appears on the screen.
"[Market makers] would be able to call it on a separate page, but they'll have to call it to get the whole book," Ketchum said. "That's a key difference in the limit-order book. It would disseminate all the limit orders, not just the top of the book. The order-routing and execution system again should be seamless, and dramatically reduce their exposure and difficulty in handling orders."
The NASD is hoping for final SEC approval by June, and to implement the proposed trading system, perhaps with OptiMark on board, by year's end.
