Nasdaq Wins
Battle at S.E.C. on New System for Trading
A costly lobbying and regulatory battle
over the future of the Nasdaq stock market drew to a close today when, over the
heated objections of rivals, the government approved its use of a new automated
trading system.
The system, which cost Nasdaq more than
$100 million to develop and had been repeatedly stymied by the lobbying efforts
of its rapidly growing competitors, will let investors view orders placed
through a variety of marketplaces that are now separate from one another.
The architects of the system say that by
posting stock prices and orders from all market participants and rivals, the
new system — known as SuperMontage — will enable stock traders to pick from a
variety of sources for the lowest buy and highest sell prices.
But competing electronic trading companies
including Instinet, a subsidiary of the Reuters Group, and Archipelago have
steadily eroded Nasdaq's trading business to the point that they now say they
execute more than half the trades in Nasdaq stocks.
The rivals, which began competing with
Nasdaq in 1998, have complained that Nasdaq's new system would create a new and
anticompetitive marketplace. SuperMontage should more aptly be called
supermonopoly, they say, because it will put them at a competitive disadvantage
and damp the kind of competition and innovation that have made trading less
expensive for investors over the last five years.
Both Nasdaq and its rivals have viewed the
regulatory battle, which began almost the day the system was proposed in the
fall of 1999, as crucial to their survival. The two sides have spent millions
of dollars in lobbying and political contributions to press their competing
claims with regulators, lawmakers and administration officials in one of the
biggest Wall Street battles in Washington.
In the fight, Nasdaq spent more than $1.5
million last year alone and retained three well-known former members of
Congress now working for lobbying firms — Bill Paxon, Vin Weber and Vic Fazio. The
Nasdaq rivals, in turn, hired such lobbying notables as Dennis Shea, a former
top aide to former Senator Bob Dole, and Ed Gillespie, a top Republican
fund-raiser.
As they approved Nasdaq's new system,
officials at the Securities and Exchange Commission said they had sought to
balance concerns raised by rivals about anticompetitive aspects of the system
against the promise that it may actually lead to important advantages for
investors.
"My predisposition is to have as much
competition in the marketplace as we can, provided it is fair competition,"
said Harvey L. Pitt, the chairman of the commission. Paul S. Atkins, a new
commissioner, raised the question of how the commission might monitor any
instances of anticompetitive conduct.
For Nasdaq, the marketplace most
responsible for fueling both the rapid rise and then sharp stock decline in
technology and telecommunications companies over the last few years, the new
system represents nothing short of survival.
Nasdaq's market share has decline
significantly in recent years, although it remains the nation's second-largest
exchange after the New York Stock Exchange. Nasdaq has also suffered from the
sharp drop in the prices of technology shares.
NASD, formerly the National Association of
Securities Dealers, which built and owns Nasdaq, is now planning to spin the
market off as a for-profit company, a plan that features its new automated
trading system as its centerpiece.
In granting Nasdaq the preliminary
approval of the new system in January 2001, the S.E.C. ordered it to create an
alternative automated system for those electronic trading networks that do not
want to use SuperMontage. Known as the Alternative Display Facility, or A.D.F.,
the other system posts stock prices but does not permit its users to execute
trades.
Commission officials said today that they
had struggled to balance Nasdaq's need to begin using SuperMontage against
claims by rivals that they needed time to set up operations with the
alternative system.
"The dilemma we face is if there are
market participants that want to use A.D.F., they need more time to complete
their testing," said Annette L. Nazareth, head of the commission's
division of market regulation. "But if this time is not used to test the
new system, then further delay serves no purpose other than to delay a competitor."
In its order today, the commission said
Nasdaq could begin using SuperMontage on Sept. 6 unless a rival certified under
oath that it intended to use the alternative system. In that case, Nasdaq may
have to delay the start of SuperMontage until Oct. 11.
One trading network, Bloomberg Tradebook,
a unit of Bloomberg L.P., has already indicated that it will use the
alternative system.