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At STOCKS & COMMODITIES, when we start getting a slew of products to review along one line, that's a sure sign that times are changing. You've seen in these pages the steady migration of trading information from software running on your computer to software running on someone else's computer, with just the display running on your machine. Nowadays, just getting the trade into the ether is a competitive issue: there must be at least nine direct-access brokers who'd be delighted to provide you with high-speed, direct access to Nasdaq, the New York Stock Exchange (NYSE), and all the electronic communications networks (ECNs).
But it's the ECNs' intent that's the most spectacular. They aim at nothing less than replacing the bricks-and-mortar exchanges, and they have technology and youth on their side. Though I'm of the stealth and treachery generation, I'm betting on Generation Y. They have virtue on their side, and their newest opposition (Nasdaq, which actually isn't a concrete exchange) doesn't come to the competition with a clean competitive history.
For example, when Nasdaq was running the show for all the stocks it listed, before the Securities and Exchange Commission (SEC) mandated rules for handling orders, its dealers demonstrated a consistent ability to structure the market for its own benefit. Spreads were astronomical, and the SEC later found fraud, price-fixing, and collusive pricing. The Order Handling Rules made it possible for ECNs to show better pricing than the dealers, resulting in better results for customers and the creation of the direct-access software and servers, which in turn resulted in even better execution for the retail side.
So successful have the ECNs been in providing better execution and market displays that Nasdaq now wants to go into the ECN business and attract to its members the order flow and liquidity the ECNs enjoy. Nasdaq's system is called Super Montage. The idea is that other ECNs will be able to compete with Super Montage, but Nasdaq will regulate them and require them to pay Nasdaq transaction and market data fees to boot. In effect, a competitive source of trading liquidity will become either a fief of Nasdaq or die out, leaving Nasdaq the sole source of liquidity for Nasdaq-listed issues.
When Super Montage begins to operate, the moneys paid by the ECNs for data and access will end up in the hands of the members (or owners) of Nasdaq. Dealers will still be able to pay for order flow, giving them a solid revenue base the ECNs won't have. Even if Nasdaq succeeds in becoming a for-profit entity, its biggest owners will be the dealers who compete with the ECNs. Nasdaq will simply front for them.
Sure, the SEC created and maintains Nasdaq's monopoly on these issues, but Nasdaq's proposal gives the SEC the chance to completely rethink Nasdaq itself. It's time to break up Nasdaq's monopoly and let the dogfight between the competing markets, new and old, begin.
