SuperMontage: Customer Expansion on Horizon?

Fighting a fierce battle for transaction supremacy with the recently allied Instinet/Island electronic communications network (ECN) tag-team, Nasdaq is considering whether it should make SuperMontage more accessible to a broader range of market participants. Currently, only Nasdaq market makers can post limit orders in SuperMontage -- the advanced order display and execution network Nasdaq launched on October 14. But the stock market is now pondering whether it should allow order-entry firms, and other groups outside of its market-making community, to display their limit-order quotes on SuperMontage.

SuperMontage was built, in part, to give Nasdaq a centralized liquidity pool that could, potentially, enable the market to recapture some of the order flow it had lost to ECNs over the last five years. But in the month following SuperMontage's launch, Instinet/Island maintained its status as the largest execution destination for Nasdaq stocks, recording a market share of between 29 and 32 percent for equities listed on Nasdaq's new trading network. The market share of SuperMontage, in contrast, has fluctuated between 20 and 30 percent since the platform made its debut.

But Nasdaq may be able to broaden the appeal of SuperMontage if it decided to provide non-market makers with the ability to post limit orders - or orders to buy or sell a stock at a customer-specified price. "(Today), only people who are registered market makers in any given stock can actually enter limit orders into SuperMontage. That obviously cuts you off from the vast majority of the addressable market. But I think SuperMontage will eventually be opened up to non-market makers," says Matt Andresen, the former Island chief executive officer who was recently named head of global trading at the securities firm Sanford C. Bernstein. "I don't know if they'll open it up to order-entry firms. But a market maker registered in one stock, in the future, will be able to trade any stock over SuperMontage. So if I'm (a market maker) in Intel, I (will be able to) use SuperMontage to trade Cisco. Whereas now if I'm in Cisco, I can trade Cisco and nothing else."

While noting that order-entry firms can already input market orders into SuperMontage, Dean Furbush -- executive vice president of transaction services at Nasdaq -- says that Nasdaq is presently weighing whether it should allow order-entry firms to display limit orders on its platform. "The way it stands now is that only marketable orders can go in .... (But) we're talking about whether we should allow order-entry firms to post limit orders in SuperMontage," he explains.

Instinet/Island, in contrast to SuperMontage, allows a variety of market participants -- including market makers, buy-side institutions and order-entry firms -- to display limit orders in the order books of its ECNs. "If you're a market maker or a buy-side customer or a proprietary trader or a program trader, you can all post quotes," says Instinet Chief Executive Officer Ed Nicoll. "You can all get in line at the same time, and can all move a market."

The rollout of SuperMontage, which will ultimately support Nasdaq's full complement of roughly 3,500 stocks, is scheduled to be completed by Dec. 2. Instinet, which finalized its merger with Island on Sept. 20, is currently attempting to meld its matching engine with the engine employed by its former rival. The firm expects to complete its matching engine integration within 12 months.