Consolidation among US Electronic Communications Networks appears inevitable following the approval by the Securities and Exchange Commission of Nasdaq's controversial SuperMontage trading system.
The proposed upgrade to the Nasdaq order display window has gone through eight previous amendments, with critics accusing the exchange of attempting to stifle competition from alternative trading systems.
SuperMontage integrates the current auto-execution (SOESSM) and order delivery (SelectNet) systems into a single pipeline with the aim of providing more efficient routing of orders and executions. Key to this is the ability for dealers to post trades anonymously - a feature which is currently available only through ECNs.
Implementation of the new decimal-based system is expected to be in early 2002. The Nasdaq screen will be redesigned to include, for the first time, the aggregate size of the best bid/best offer of each security on Nasdaq and the aggregate size one and two price levels away, providing investors with a range of order options.
Analysts expect the introduction of SuperMontage to lead to a wave of consolidation among ECNs as they strive to build and attract the volumes required to get to the top of the order book.
Welcoming the SEC's decision, Nasdaq chairman and CEO Frank Zarb comments: "The process we've gone through to get to this point has been difficult, but it was worth it. The input from our market participants, including Market Makers, ECNs, and investors during the rule-making process, both suggestions and criticisms, has resulted in a better finished product and a consensus for us going forward."
The bigger ECNs, such as Instinet and Archipelago, swung behind the initiative at the last minute, following the inclusion of a late modification to the proposals limiting Nasdaq's monopoly as a securities information provider.