Nasdaq has received final approval from the Securities and Exchange Commission to launch SuperMontage -- it's much-ballyhooed order-display and execution network. But while it seems likely that SuperMontage will receive significant support from Nasdaq's market-maker community, the two largest electronic-communications networks -- Instinet and Island -- seem ready to post their Nasdaq quotes in the National Association of Securities Dealers' Alternative Display Facility.
In 2001, the SEC mandated the creation of the ADF to provide an option for ECNs that did not want to show their Nasdaq prices on SuperMontage, and the commission recently ruled that ECNs' participation in ADF will determine the actual start date of Nasdaq's network. ECNs, in compliance with the SEC's SuperMontage ruling, have until Sept. 5 to decide whether they are going to display their Nasdaq quotes in the ADF. If any ECN agrees to post the majority of its Nasdaq quotes on the ADF, SuperMontage will make its debut on Oct. 11; if no ECN steps forward to back the ADF, Nasdaq will launch SuperMontage on Sept. 17.
ADF, a quote display and trade-reporting facility, actually went live on July 29. However, it has received a frosty reception from ECNs -- partly because it does not possess the order-routing and executing capabilities it needs to truly compete with SuperMontage. In fact, the SEC was concerned enough about the apathy surrounding ADF to delay the rollout of SuperMontage, which was initially scheduled to go live on July 29.
Though the ADF has yet to receive a public commitment from a major Nasdaq participant, it appears likely that Instinet, the largest ECN, will post its over-the-counter quotes on the NASD's facility. "We are very happy with the SEC's decision, in that it provides us with a better opportunity to move to the ADF," says an Instinet spokesman. Instinet, he says, is "absolutely" leaning heavily towards displaying its Nasdaq quotes in the ADF, but needs a little more time to establish connectivity to the facility.
Of course, if Instinet decides to post its quotes in the ADF, it's likely that Island -- which is in the midst of finalizing a union with its one-time rival -- will eventually follow. Island, the second largest ECN, is expected to complete its merger with Instinet before the end of this year. Prior to allying with Instinet, Island initially said it would post on SuperMontage, but later had second thoughts after Nasdaq implemented some regulatory fees that were based partly, on the number of quote updates a participant generates.
Island has in fact threatened to take its quote business to Cincinnati Stock Exchange, the market in which it now prints the majority of its Nasdaq trades. But in order for Island to do that, the CSX would still have to hurdle some major regulatory obstacles, and the ADF, despite its deficiencies, seems like a more timely and logical alternative -- especially if it manages to snare Instinet.
But while SuperMontage may not be the venue of choice for the two largest ECNs, it should have significant appeal in Nasdaq's market-maker community, says Rick Spear, a managing director at Oliver Wyman & Co. -- a financial-services consulting firm. Spear says that the liquidity and transparency of SuperMontage should help boost the margins of market making firms. "SuperMontage is going to allow broker/dealers to repatriate some of the institutional volume that has gone to ECNs," he says.
Spear says that SuperMontage will also provide a lift to "second-tier" ECNs -- such as Brut and Bloomberg Tradebook. If these ECNs decide to participate in SuperMontage, he says, their quotes will be visible to all the broker/dealers using the network -- including many broker/dealers that have previously never routed orders to second-tier ECNs. "These ECNs could get greater exposure to a large number of dealers who do not currently have direct access to all the ECNs," says Spear.
SuperMontage, which will have the capability to display the five best bids and offers for every stock Nasdaq trades, has been in a testing phase since July 29. A Nasdaq spokesman says that nearly 200 firms have performed test trades on the system, including market makers, broker/dealers, order-management system vendors and ECNs. Instinet, Island, Brut and Tradebook, he says, have been among the ECNs that have tested on SuperMontage. However, the spokesman says that Nasdaq will not know, for certain, which ECNs will participate in SuperMontage until the system goes live.