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Nasdaq Unwinds Exclusive with Primex Auction System

The Nasdaq Stock Market will shut down the Prime Auction System this month to cut costs and consolidate trading functionality on SuperMontage.

In a move to cut costs and focus on SuperMontage as its core-trading platform, The Nasdaq Stock Market will shutter the Primex Auction System on January 16. The stock market operates the electronic-auction system as a facility of Nasdaq under an exclusive rights agreement with Primex Trading N.A., LLC., a partnership formed by several leading Wall Street firms. "We will no longer be offering it," says a Nasdaq spokeswoman. "For us it's a shift in strategy as we look to consolidate our service to have one common functionality system, which is SuperMontage," the spokeswoman adds.

With a sharp focus on increasing volume through SuperMontage, Nasdaq has been pulling the plug on a number of ancillary initiatives. The closure of Primex is just one of many cutbacks Nasdaq has carried out, including Bulletin Board, Liquidity Tracker and international ventures such as Nasdaq Europe and Nasdaq Deutscheland.

Money seems to be at the heart of this decision.

"It sounds to me (like) Nasdaq is looking to cut costs and it was paying Primex probably a nice sum to get the exclusive rights to use Primex," comments Jodi Burns, analyst with Celent Communications in New York City.

Primex was built as a hybrid of a dealer market and an auction market, with the opportunity for price improvement. In the context of Nasdaq, an order is submitted to Primex for price improvement, and if there is no opportunity for price improvement, the order is automatically sent to SuperMontage for execution, says Burns.

According to Len Mayer, acting chief executive officer of Primex Trading, Nasdaq had exclusive rights to the system from 2001 through the end of 2003. If Primex didn't meet certain thresholds of volume, it could walk away from the license, he says. The system was averaging 30 million to 40 million shares a day, with 60 percent in listed stocks and 50 percent in Nasdaq, he says.

The problem was convincing people in a tough market environment that they had to get involved. "When you knocked on the door, no one was interested in taking on new trading systems, lines or connections," says Mayer. Another factor impacting Primex's fate was the tightening of spreads. When spreads were a penny or two (cents), market makers no longer (felt) they had to offer price improvement," he says.

Given that Primex was not doing much volume, it was a safe area in which to cut costs, says Burns. "This is not a functionality that was widely demanded by Nasdaq customers. So there shouldn't be too much hollering now that this exclusive contract is gone," says the analyst.

But Burns says she never understood the business proposition behind Primex because price improvement had never been the mechanism on which Nasdaq traded. "It was always speed, it never had been price improvement," she says, though she adds, that price improvement is a great marketing strategy that has worked for the New York Stock Exchange.

Now it's clear that Primex is not going to take-off, she says. Primex has given plenty time to build off the SuperMontage volume and Nasdaq is in cost cutting mode. The system was created in 1998 by a partnership of major securities dealers and investment banks including Bernard L. Madoff Investment Securities, Goldman Sachs, Merrill Lynch, Morgan Stanley and Salomon Smith Barney.

While it is not clear how much Nasdaq invested in Primex, when the joint venture was announced in December 1999, Nasdaq pledged to share in the development costs, pay a monthly licensing fee to Primex and rebate some portion of the transaction fees from Primex executions, says Burns. Since Nasdaq didn't charge transaction fees during the pilot phase, it didn't make any Primex transaction fees until 2002. In 2002, Nasdaq collected only $400,000 in Primex transaction fees, says Burns. "Clearly, Nasdaq lost money on every aspect of the arrangement," she says.

Meanwhile, the Nasdaq spokesperson notes that Primex plans to continue with their technology. Now that the exclusive with Nasdaq has ended, Mayer says Primex Trading is now free to negotiate with other exchanges and market centers. It has already been approached by a number of international exchanges and market centers, but it is very early in the discussion period. Primex also has a patent pending on its technology. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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