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Nasdaq ETP Trading

Written By Brian Hicks

Posted April 30, 2013

Nasdaq OMX Group (NASDAQ:NDAQ) will soon be launching a platform for ETP trading.

Stock TradingIt’s actually a relaunch of its PSX trading platform, which will occur in May, after the SEC issues regulatory approval. Nasdaq will also offer attractive incentives to firms that do regular business with ETPs at the publicly quoted price, thus becoming indicators of the market and making for a more fluid trading experience overall. PSX was first launched back in 2010.

From Bloomberg:

“We’re focused on delivering long-term value to investors by significantly broadening the asset classes we offer to our member firms, and the establishment of a preeminent marketplace for ETPs supports that effort,” Eric Noll, who heads Nasdaq’s U.S. and UK transaction services, said in a statement.

Bloomberg reports that the PSX, when launched, will follow a ranking of orders by price, with subsequent rankings by time for all orders at the same price point.

PSX will also “offer Registered Market Maker and PSX Supplemental Liquidity Provider (XLP) designations to participants that undertake an affirmative quoting obligation”, as Finextra reports. The intent of this would be to ensure that liquidity is available as well as ample information. The new Lead Market Maker program is also engineered to reduce spread sizes and maximize the displayed size in ETP securities.

The ETP Bubble

It’s an interesting time for Nasdaq. Last year, ETPs were all the rage. However, as products got more and more obscure, the general trading community began to clam up and get a bit wary.

As interest declined and average daily volumes began to go down, the market makers stopped showing interest in maintaining tight spreads and large ETP quotes, Pensions and Investments reports. Overall, demand dropped.

What the ETP market needs is improvements to the available trading metrics. The idea would be to improve the information available to investors and market makers, thereby restoring confidence in ETPs. That’s exactly what Nasdaq’s proposed relaunch would aim to do.

Other Trading Platforms

Nasdaq also recently planned a move to stimulate share trading that focuses on rapid-growth and newly-emergent tech companies. The Nasdaq-SharesPost venture would create a marketplace for pre-IPO private companies, which would let these companies’ shares be traded and thus provide liquidity for early investors, company employees, and founders.

Such private investing has, in the past, led to interesting results—recall the high-flying pre-IPO valuations for Facebook, Zynga, etc.

With SharesPost, the Nasdaq Private Market takes on a whole new look. Brokerage operations remain separate, but Nasdaq’s market and operations base combines with SharesPost’s online platform, helping to provide investors with access to venture-backed companies about to go public.

The PSX news continues Nasdaq’s bid to expand its operations. In 2012, Nasdaq bought out Thomson Reuters’ investor-relations, public relations, and multimedia services units in a $390 million deal. And this year, Nasdaq is about to buy an electronic bond trading platform called eSpeed from BGC Partners Inc. (NASDAQ:BGCP) in a deal worth about $750 million.

Bonds used to be traded over the counter, but the eSpeed/Nasdaq combination could seriously change how that market works. eSpeed would allow users to trade bonds over an electronic platform, and Nasdaq’s expertise in managing electronic trading suggests it would be a relatively smooth transition.

Clearly, Nasdaq is hoping that these changes will significantly restructure the stock market itself. Electronic trading, of course, is pervasive and certainly far more convenient and efficient than older physical systems. Certainly, electronic trading has presented its own concerns; high-frequency trading is most commonly cited as one of the big problem areas.

However, indexes and markets have, over the years, become better at managing the vagaries of digital trading. Evidently, Nasdaq is hoping to position itself as a leader in providing comprehensive electronic trading systems that cover bonds, ETPs, and conventional stocks.

It’s far too soon to offer a verdict on whether the stock market will swing the way Nasdaq expects it to, but we should definitely expect some major changes to the stock market experience soon.


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