The equity exchange industry in the U.S. for NASDAQ_OMX

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NDAQ » Topics » The equity exchange industry in the U.S.

These excerpts taken from the NDAQ 10-K filed Feb 25, 2008.

The equity exchange industry in the U.S.

Equities trading function. The main participants in the U.S. cash equities marketplace are The Nasdaq Stock Market, the NYSE, the Amex, a number of regional exchanges (Chicago and the National Stock Exchange in Cincinnati) and ECNs (sometimes referred to as alternative trading systems, or ATS).

The Nasdaq Stock Market serves as one of two principal market centers for buying and selling exchange-listed securities in the U.S. Additionally, there are other exchange trading venues such as Amex and regional exchanges. Unlike the specialist-based or hybrid markets, such as Amex or NYSE, The Nasdaq Stock Market is a fully electronic, screen-based, enhance order book system where market makers’ bids and offers can be reviewed and accessed for automatic execution by all market participants at any time. In addition, The Nasdaq Stock Market system provides a mechanism for all market participants (i.e., both order entry firms and brokers or market makers) to post non-marketable limit orders and to access posted limit orders both for their own account and when representing their customers on an agency basis, further enhancing liquidity.

The average daily trading volume on U.S. exchanges increased from 3.1 billion in the year ended December 31, 2000 to 6.2 billion for the year ended December 31, 2007. Total U.S. equity trading volumes grew approximately 25.7% during 2007 as compared the prior year. Industry growth is driven by economic expansion, increased volatility, lower trading costs and the shift away from floor-based to electronic trading platforms with significantly enhanced trading technology that provides faster execution speeds. Growth in U.S. trading has also been significantly influenced by increased participation from retail and overseas investors and regulatory changes.

Listing function. The Nasdaq Stock Market and the NYSE are the primary listing venues for equity securities in the U.S. Additionally, the Amex has a smaller number of listings. At December 31, 2007, there were 3,135 listings on The Nasdaq Stock Market.

Of the 213 IPOs on U.S. equity markets during 2007, 132, or approximately 62%, chose to list on The Nasdaq Stock Market, raising approximately $16.8 billion in equity capital, while the remainder listed on the NYSE. Of the 206 IPOs on U.S. equity markets during 2006, 137, or approximately 67%, chose to list on The Nasdaq Stock Market, raising approximately $17.4 billion in equity capital, while the remainder listed on the NYSE or other markets.

Market data function. Nasdaq serves as one of two central providers of real-time quote and trade data for U.S. exchange listed securities. It acts jointly with other national securities exchanges to collect and disseminate a consolidated stream of quotation and transaction information under national market system plans approved by the SEC. Nasdaq is the central provider of data for Nasdaq-listed securities and NYSE is the central provider of data for NYSE and Amex-listed securities.

Regulation NMS. Regulation NMS, which was fully implemented in 2007, has been a key driver behind the changes in execution services and market data businesses in the U.S. The following information describes the key directives of the regulation.

•

Best price rule: Among the most significant provisions of Regulation NMS are order protection, also referred to as the “best price” rule, and fair access regulations. The order protection rule requires exchanges and other trading centers to establish procedures designed to prevent the execution of trades at prices inferior to “protected” quotations displayed by other exchanges. Under the order protection rule, each exchange must interact with any market center offering a superior price before it can execute a trade at an inferior price on its systems for other reasons (such as trade size).

•

Fair access rule: The access rule requires market centers to provide fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers and requires all exchanges to maintain written rules that prohibit their members from displaying quotations that lock or cross automated quotations.

•

Market information rule: Regulation NMS also contains several market data rules that update the requirements for consolidating, distributing and displaying market information. These rules amend the current plans which disseminate consolidated market information by modifying the formulas for allocating plan revenues and broadening participation in plan governance.

•

Sub-penny rule: The sub-penny rule prohibits market participants from displaying quotations in pricing increments smaller than a penny, with exceptions for quotes and orders priced at less than $1.00 per share.

The equity exchange industry
in the U.S.

Equities trading function. The
main participants in the U.S. cash equities marketplace are The Nasdaq Stock Market, the NYSE, the Amex, a number of regional exchanges (Chicago and the National Stock Exchange in Cincinnati) and ECNs (sometimes referred to as alternative trading
systems, or ATS).

The Nasdaq Stock Market serves as one of two
principal market centers for buying and selling exchange-listed securities in the U.S. Additionally, there are other exchange trading venues such as Amex and regional exchanges. Unlike the specialist-based or hybrid markets, such as Amex or NYSE,
The Nasdaq Stock Market is a fully electronic, screen-based, enhance order book system where market makers’ bids and offers can be reviewed and accessed for automatic execution by all market participants at any time. In addition, The Nasdaq
Stock Market system provides a mechanism for all market participants (i.e., both order entry firms and brokers or market makers) to post non-marketable limit orders and to access posted limit orders both for their own account and when representing
their customers on an agency basis, further enhancing liquidity.

SIZE="2">The average daily trading volume on U.S. exchanges increased from 3.1 billion in the year ended December 31, 2000 to 6.2 billion for the year ended December 31, 2007. Total U.S. equity trading volumes grew approximately 25.7%
during 2007 as compared the prior year. Industry growth is driven by economic expansion, increased volatility, lower trading costs and the shift away from floor-based to electronic trading platforms with significantly enhanced trading technology
that provides faster execution speeds. Growth in U.S. trading has also been significantly influenced by increased participation from retail and overseas investors and regulatory changes.

SIZE="1">

Listing function. The Nasdaq Stock Market and the NYSE are the primary listing venues for equity securities in the
U.S. Additionally, the Amex has a smaller number of listings. At December 31, 2007, there were 3,135 listings on The Nasdaq Stock Market.

STYLE="margin-top:0px;margin-bottom:0px; text-indent:4%">Of the 213 IPOs on U.S. equity markets during 2007, 132, or approximately 62%, chose to list on The Nasdaq Stock Market, raising approximately $16.8
billion in equity capital, while the remainder listed on the NYSE. Of the 206 IPOs on U.S. equity markets during 2006, 137, or approximately 67%, chose to list on The Nasdaq Stock Market, raising approximately $17.4 billion in equity capital, while
the remainder listed on the NYSE or other markets.

Market
data function. Nasdaq serves as one of two central providers of real-time quote and trade data for U.S. exchange listed securities. It acts jointly with other national securities exchanges to collect and disseminate a consolidated stream of
quotation and transaction information under national market system plans approved by the SEC. Nasdaq is the central provider of data for Nasdaq-listed securities and NYSE is the central provider of data for NYSE and Amex-listed securities.

Regulation NMS. Regulation NMS, which was fully implemented in 2007, has been a key driver behind
the changes in execution services and market data businesses in the U.S. The following information describes the key directives of the regulation.

•

Best price rule: Among the most significant provisions of Regulation NMS are order protection, also referred to as the “best price” rule, and fair
access regulations. The order protection rule requires exchanges and other trading centers to establish procedures designed to prevent the execution of trades at prices inferior to “protected” quotations displayed by other exchanges. Under
the order protection rule, each exchange must interact with any market center offering a superior price before it can execute a trade at an inferior price on its systems for other reasons (such as trade size).

STYLE="margin-top:0px;margin-bottom:-6px">

•

Fair access rule: The access rule requires market centers to provide fair and non-discriminatory access to quotations, establishes a limit on access fees to
harmonize the pricing of quotations across different trading centers and requires all exchanges to maintain written rules that prohibit their members from displaying quotations that lock or cross automated quotations.

•

Market information rule: Regulation NMS also contains several market data rules that update the requirements for consolidating, distributing and displaying
market information. These rules amend the current plans which disseminate consolidated market information by modifying the formulas for allocating plan revenues and broadening participation in plan governance.

STYLE="margin-top:0px;margin-bottom:-6px">

•

Sub-penny rule: The sub-penny rule prohibits market participants from displaying quotations in pricing increments smaller than a penny, with exceptions for
quotes and orders priced at less than $1.00 per share.

SIZE="2">Outlook and future trends

Trading
volume in both the U.S. and European equity markets has continued to grow meaningfully over the past few years. Industry growth is being driven by additional demand for active and transaction-intensive asset management, the shift away from
floor-based to electronic trading platforms, lower transaction costs, narrow spreads, significantly enhanced technology, increased participation from retail investors and regulatory changes. As pension funds and institutional investors shift greater
allocations to hedge funds and alternative asset managers who use sophisticated and complex trading strategies, volumes are expected to continue to increase. The strategies implemented by these investors, including quantitative and program trading
models are transaction-intensive. Electronic trading has enabled buyside traders to access the market with minimal infrastructure or systems costs. Furthermore, as sellside trading firms have grown operations and pushed toward faster and more
automated trading, volumes have increased substantially, creating value not only for trading firms, but for the exchanges handling the trading.

STYLE="margin-top:0px;margin-bottom:0px; text-indent:4%">At the same time, macro and demographic trends are helping to drive ongoing volume growth. The rising life expectancy of an aging population is forcing a
larger absolute number of investors to seek higher returns in the global equity markets. This is also contributing to changes for traditional institutional investors whose focus was to ensure that their own investment strategy was more profitable
than a comparative index. Today, demand is instead directed toward more stable returns, measured in absolute terms over a longer period, for which more active and transaction-intensive management is required. An increasing number of hedge funds have
entered the industry to cater to this increased institutional demand. Other participants, such as traditional pension funds, are adopting new investment strategies and are also becoming increasingly active in their management. At the same time, the
use of more advanced and innovative methods and technologies for securities trading is spreading, resulting in an increasing number of transactions and a higher turnover rate.

SIZE="1">

EXCERPTS ON THIS PAGE:

10-K (2 sections)	Feb 25, 2008

NASDAQ OMX Group (NDAQ)

NDAQ » Topics » The equity exchange industry in the U.S.

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