SuperMontage is Almost Here, But Questions Still Remain

The launch of the Nasdaq Stock Market's much-ballyhooed SuperMontage order-display and execution network is just around the corner, promising to deliver never-before-seen transparency to market participants. However, as Nasdaq ramps up for a July 29 rollout of SuperMontage, the level of commitment it will receive from electronic communications networks (ECNs) -- a group that accounts for more than one-third of Nasdaq's total share volume --- remains unclear.

Thus far, only Brut and MarketXT, a pair of smaller ECNs, have signed deals to post their Nasdaq quotes on SuperMontage -- a network that will display the five best bids and offers, per stock, from all of its participants. Island, which is now the second-largest ECN, had publicly stated its intention to list its Nasdaq quotes on SuperMontage back in April. But Island seemed to have a change of heart after the Nasdaq, in May, announced its intention to charge its participants regulatory fees that would be based, partly, on quote updates, and now -- thanks to its planned merger with Instinet, the largest ECN -- Island is faced with a whole different set of integration challenges.

Since Instinet and Island, combined, would account for roughly 24 percent of Nasdaq's volume, the ECN kingpins may ultimately decide that -- in order to compete with SuperMontage head-on -- they need to post their Nasdaq quotes in a different market. One option that is available to them, of course, is the Alternative Display Facility, an SEC-mandated quote and trade-reporting facility that is currently being developed by the National Association of Securities Dealers, Nasdaq's former parent.

But at this point, the ADF is plagued by so many flaws, such as its lack of order-routing functionality, that it does not appear to be a viable option for Instinet/Island's Nasdaq quotes. In addition, while the ADF will have to build its liquidity from the ground up, SuperMontage will inherit tremendous volume from the two Nasdaq systems it will effectively replace: SuperSoes and SelectNet. Combined, SuperSoes -- Nasdaq's sole execution pipeline for all market-maker addressed orders -- and SelectNet -- an order-routing system that Nasdaq participants use primarily to send orders to ECNs -- have a 30 percent market share in Nasdaq stocks.

That volume, teamed with the added transparency that SuperMontage is going to offer, has left Nasdaq officials feeling very confident about the ability of the network to attract quotes from ECNs. Indeed, at a SuperMontage pre-launch press briefing held of July 9, Richard Ketchum, president and deputy chairman of the Nasdaq Stock Market, said that he was optimistic that SuperMontage would receive sufficient support from ECNs. ECNs, he noted, are very "concerned" about "protecting" their customers' orders, and SuperMontage will give them a superior mechanism for achieving that goal.

"SuperMontage will allow them to better represent their own customers, because the orders of those customers will be better protected than they are today, as a result of the 30 percent order flow that (already) goes through Nasdaq execution systems," Ketchum said. "We certainly hope ECNs will be there, but the great thing about a competitive environment is that people get to make a choice, and in the end it's up to them .... (However), I think that someone that doesn't have a customer order in SuperMontage has got to at least explain to a customer why not."

While it has not yet secured SuperMontage participation commitments from Island and Instinet, Nasdaq has signed a deal with Brut -- an ECN which recently snagged an all-time high of 5.32 percent of Nasdaq's share volume in a single day. Interestingly, SunGard, a former minority owner of Brut, signed a deal to acquire 100 percent equity ownership in the ECN on July 9. Terms of the transaction were not disclosed, but SunGard essentially bought out the 25 previous owners of Brut -- a group that included Bear Stearns, Goldman Sachs, Knight Trading Group, Merrill Lynch, Morgan Stanley, Robertson Stephens, Salomon Smith Barney and SunGard's own SunGard Data Systems unit.