SEC Approves New Nasdaq Trading System

In one of the few bright notes to come its way in recent months, Nasdaq won the blessing of the Securities and Exchange Commission Wednesday to dramatically revamp its electronic quote and order-processing system and give investors multiple bid and ask prices for stocks.

Nasdaq welcomed the decision, and said the new system, called SuperMontage, will allow it to provide more information to traders and investors, particularly when the market converts to trading securities in increments of one penny rather than the current one-eighth of a dollar fractions.

"The process we've gone through to get to this point has been difficult, but it was worth it," Frank Zarb, chairman and CEO of Nasdaq's parent company, the National Association of Securities Dealers, said in a statement. "SuperMontage will be a breakthrough innovation and another example of Nasdaq using the latest technology for the benefit of all market participants and investors," he said.

SEC Chairman Arthur Levitt, who is retiring from the commission, said the new system "is Nasdaq's effort to develop a more modern trading infrastructure in response to specific and concrete demands by its members. It constitutes the centerpiece of its strategy for competing with both domestic and global markets."

Better Vision

Levitt said the new system would give investors greater "transparency," or the ability to see the positions of more market players at different stock prices. He also said it should provide for quicker trades.

But, in a prepared speech he gave before the SEC signed off on SuperMontage, Levitt said: "In my tenure, there has been no more time-consuming, controversial or divisive proposed rule change."

Some of the controversy that had helped delay the proposal's approval for more than a year after Nasdaq submitted it remained Wednesday as the SEC took up its vote. Many electronic communications networks, or ECNs, have voiced concerns that the SuperMontage system would place their trading networks at a disadvantage compared with Nasdaq, and might not direct orders their way even when they offered the best prices.

Among those who have complained has been Instinet, whose CEO, Doug Atkin, offered muted comments about SuperMontage after the SEC approval Wednesday. In a statement, Atkin called the commission's decision "a first step in the restructuring of the U.S. securities markets."

Seeking Competition

He said he hoped Congress would guide implementation of the new Nasdaq trading system to assure competition between ECNs and Nasdaq.

The SEC decision came just two days after the agency released a critical analysis that concluded it was significantly more costly to trade all but the very largest of stocks on Nasdaq than on the competing New York Stock Exchange. The reason was a larger bid-ask spread -- the gap between the price asked by sellers and the price offered by buyers -- for those stocks on the Nasdaq market than on the NYSE. The two exchanges use fundamentally different trading methods. On Nasdaq, buy and sell orders for securities are matched electronically. On the NYSE, orders are matched through an auction process on the floor of the exchange.

Responding to the SEC study Monday, Nasdaq President Richard Ketchum said the SuperMontage proposal should help alleviate the larger spreads on Nasdaq.

As it is now, Nasdaq displays only the best sale price and the best purchase bid to investors. Under the SuperMontage proposal submitted to the SEC, the exchange would display three bid and offer prices.

"In our instantaneous online trading world, more information and increased liquidity is an advancement for all concerned," Zarb said.

>To order reprints of this article, click here: Reprints