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Capital Markets

Exchange regulation: Nasdaq jumps through the last of its hoops

Keeps lucrative business and becomes an exchange with formal SEC approval.

Exchange competition in the US looks set to take another twist as Nasdaq jumps through the last hoops necessary before it can get formal SEC approval as a recognized exchange.

This July, Nasdaq agreed to formally separate its off-exchange trade-reporting business by forming a joint venture with its former parent, the National Association of Securities Dealers (NASD).

Exchanges are not allowed to take credit for business conducted off their books but Nasdaq’s trade reporting facility has done so for some time.

Off-exchange trading on alternative platforms such as crossing networks, “dark books” such as Liquidnet, or internalized by brokers, is increasing but trades done on these systems still need to be reported.

The deal is significant because under Reg NMS trade reporting is set to become big business. Tabb Group estimates conservatively that reporting revenue for Nasdaq-listed securities will be worth more than $30 million in 2006 but that this figure will grow significantly once Reg NMS takes effect. The joint venture enables Nasdaq to comply with the regulation while maintaining an interest in the lucrative and expanding business.

The deal was widely opposed by rivals that claimed that it unfairly gave Nasdaq revenues from trades that had no connection to the exchange.

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