NASDAQ OMX Group (NDAQ)

Initial Public Offerings

In addition to U.S. domestic companies, 335 non-U.S. companies were listed on The Nasdaq Stock Market as of December 31, 2004. The Nasdaq Stock Market is actively pursuing additional listings from non-U.S. companies.

There is also substantial competition among the markets to encourage companies to switch listing venues or to list on more than one venue. In January 2004, Nasdaq announced an initiative to allow NYSE-listed companies to list their stock both on The Nasdaq Stock Market and the NYSE. Since announcing this “dual- listing” service, several high profile NYSE-listed companies have dual-listings on The Nasdaq Stock Market.

Trading Execution Function. The principal market centers for buying and selling equity securities in the United States are The Nasdaq Stock Market, the national securities exchanges, including the NYSE and, to a lesser extent, the regional stock exchanges, and ECNs (sometimes referred to as alternative trading systems). These market centers employ different business models for displaying current bids, offers and orders for the purchase and sale of securities and for executing those bids, offers and orders against each other.

Unlike exchanges such as the NYSE and Amex, that use an auction process conducted on a physical trading floor, the Nasdaq Market Center, our transaction-based platform, is a fully computerized, screen-based system that links over 250 competing market makers who commit capital and buy inventory to sell to market participants from their own account. The average Nasdaq-listed stock has over 20 market makers, who are required at all times to post their bid and offer prices into the Nasdaq Market Center, where such bids and offers can be reviewed and accessed for automatic execution by all market participants. In addition, the system provides a mechanism for broker-dealers (i.e., order entry firms) to post non-marketable limit orders for their own account and from their customers on an agency basis, thus further enhancing liquidity in the Nasdaq Market Center.

Nasdaq-listed securities trade, not just through the Nasdaq Market Center, but also through other market centers such as ECNs and regional exchanges. Currently, Nasdaq-listed securities trade on or are reported to Amex, the Chicago Stock Exchange, the Boston Stock Exchange, the National Exchange, NASD’s Alternative Display Facility, and the Pacific Exchange. Competition among market centers for trading volume is intense because trading volume has become increasingly portable, with broker-dealers developing systems that quickly enable them to simultaneously view liquidity across all venues and to route orders to the destination offering the best price or execution service. Nasdaq generally generates fees for transaction execution services through a transaction execution charge, assessed on a per share basis to the party that accesses the liquidity (liquidity is the number and range of buy orders and sell orders available to Nasdaq’s market participants) provided by another market participant.

Nasdaq’s largest competitors for trading in Nasdaq-listed securities are the ECNs and ArcaEx, the exclusive equities trading facility of the Pacific Exchange. In 2004, 56.7% of the trading volume in Nasdaq-listed securities was conducted on ECNs and ArcaEx, including 10.0% of trading volume through Brut ECN, which Nasdaq acquired in September of 2004.

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With the increase in competition from ECNs, new trading technologies, and the change to decimals for quoting securities prices, spreads between what buyers are willing to pay and sellers are willing to sell a security for have narrowed considerably. As a result, while price is a paramount factor for broker-dealers when determining where to route orders for execution, the cost of execution is, in many instances, an increasingly important factor in such decisions.

Nasdaq also earns revenues based on its share of trading securities listed on the NYSE and Amex via the Nasdaq Market Center, although the majority of trading at least with respect to NYSE-listed securities continues to occur on the primary listing market. For example, 79.3% of the trading volume in NYSE securities occurred on the NYSE and 13.7% was executed on the Nasdaq Market Center in 2004. In particular, Nasdaq is seeking to increase its trading volume in NYSE-listed securities. Nasdaq believes that specialist-based auction markets do not provide the same speed and execution accuracy as its electronic execution platform. Currently, trades executed through Nasdaq’s trading platform are completed up to 3.3 times faster than those executed on the NYSE, thereby giving Nasdaq Market Center participants greater assurance of execution. However, Nasdaq may be hindered from increasing its market share in trading NYSE-listed securities due to regulatory limitations imposed by the “trade-through” rule of the Intermarket Trading System, which links the exchanges and markets. See “—Regulation—Recent Regulatory Developments.”

The Market Data Function. In the 1970s, the U.S. Congress passed legislation, and the SEC adopted rules, to create a national market system that provides participants in U.S. equity securities markets with a consolidated stream of quotation and transaction information from The Nasdaq Stock Market and the exchanges. The Nasdaq Stock Market and the exchanges act jointly to collect and disseminate this information regarding the bids, offers and orders posted by market participants and information regarding price and volume for executed trades under national market system plans approved by the SEC. These plans created securities information processors to consolidate information with respect to best bid and offer information and transactions, in order to increase information availability and thus create the opportunity for a more transparent and effective market.

The price and transaction information collected under these national market system plans—the Consolidated Tape Plan (the “CTA Plan”) and the Consolidated Quotation Plan (the “CQ Plan”) in the case of exchange-listed securities, and the Nasdaq Unlisted Trading Privileges Plan (the “UTP Plan”) in the case of Nasdaq-listed stocks—is sold for a fee to data vendors, who in turn sell the information to market participants such as broker-dealers and to the public. These fees are referred to as “tape fees.” After costs are deducted, the tape fees are distributed among the participants in each of the national market system plans based on their transaction volume. ECNs are required to report trades executed through their systems for incorporation into the consolidated market data, but ECNs are not eligible to receive a portion of the fees directly under the terms of the plans. Certain exchanges and markets, including Nasdaq, also sell proprietary trade, quote and other market information directly to market participants as well as vendors.

As noted above, market data for exchange-listed securities is consolidated through the CTA/CQ Plans and, as a member of these plans, Nasdaq shares in the revenues from the sale of market data related to transactions in exchange-listed securities. Under the UTP Plan, each participant can quote and trade any security listed on The Nasdaq Stock Market. The UTP Plan entitles these exchanges to a share of Nasdaq’s tape fee revenues, roughly proportional to such exchanges’ share of trading of Nasdaq-listed securities, as measured by share volume and number of trades.

Certain regional exchanges, such as the National Stock Exchange, have established programs to share the tape fee revenues they received under the UTP Plan with market participants, including ECNs, that execute and/or report trades in Nasdaq-listed securities through their facilities, in order to increase their share of tape fee revenues. Nasdaq also implemented a program to share the tape fee revenues it earned from the UTP Plan. As a result of these actions, some ECNs and other market participants that internalized order flow began to report their trades through the exchanges, rather than through Nasdaq. This increased the tape fee revenues Nasdaq shared with other UTP Plan participants from the UTP Plan thereby reducing the amount of UTP Plan tape fee revenues

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retained by Nasdaq. In July 2002, the SEC issued an order that abrogated the Nasdaq’s and the regional exchanges’ tape fee revenues sharing programs. The SEC’s action was in response to concerns about the effect of tape fee rebates on the accuracy of market data and the regulatory functions of self-regulatory organizations.

Nasdaq’s share of UTP Plan market data fees and tape fee revenues is directly tied to its share of trade executions and trade reports in Nasdaq-listed securities and trade executions in exchange-listed securities. In order to increase its share of trading activity, in August 2003 Nasdaq filed with the SEC on an immediately effective basis, a new Nasdaq General Revenue Sharing program, which provides for sharing operating revenues, which is net revenues after expenses from all services that derive revenues from member trading and trade-reporting activity in Nasdaq-listed securities. Nasdaq began sharing revenues under the new program in January 2004. Nasdaq’s acquisition of Brut, which previously reported its quotes and trades to the Boston Stock Exchange, has increased Nasdaq tape fee revenues, as Brut now reports its quotes and trades to Nasdaq.