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Changes in Market Structure: Approaches to Securities Trading 15 April 2003

Changes in Market Structure: Approaches to Securities Trading 15 April 2003. Alfred R. Berkeley, III Vice Chairman The NASDAQ Stock Market. Creating An Efficient Consolidated Market. National Markets. Broker-Dealers. Competitive Challenges – Fragmentation Improve Access and Lower Costs.

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Changes in Market Structure: Approaches to Securities Trading 15 April 2003

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  1. Changes in Market Structure:Approaches to Securities Trading15 April 2003 Alfred R. Berkeley, III Vice Chairman The NASDAQ Stock Market

  2. Creating An Efficient Consolidated Market National Markets Broker-Dealers • Competitive Challenges – Fragmentation • Improve Access and Lower Costs Electronic Brokerage Firms (ECNs) Secondary Markets

  3. Three Liquidity Models Three Types of Growth Accelerated Steady Declining No Professional Liquidity Providers(ECNs) Bull SingleLiquidity Provider(NYSE, AMEX) Three Types of Markets Bear MultipleLiquidity Providers(NASDAQ) Panic

  4. Three Liquidity Models Three Types of Activity High Volume Medium Volume Low Volume No Professional Liquidity Providers(ECNs) Bull SingleLiquidity Provider(NYSE, AMEX) Three Types of Markets Bear MultipleLiquidity Providers(NASDAQ) Panic

  5. Average Daily Trades by Dollar Value of Float Category Average daily trades for all stocks within each dollar value of float category. All common stock on NASDAQ National Market and NYSE; NYSE data represent specialist trades only. Source: NASDAQ ER DataMart, FactSet Research Systems. December 2002.

  6. Severe Competition in the 1990s

  7. Integrating Market Models Improves Liquidity

  8. NASDAQ Initiatives Reduce Liquidity Costs • NASDAQ continues to enact a variety of initiatives to reduce liquidity costs, ultimately reducing the cost of capital and increasing shareholder value. Value = NPV(Cash Flows)(1-Cost of Capital) Cost of Capital = Risk Premium + Liquidity Premium Risk Free Rate of Return Company Risk IR tools, Brand Development Adverse Selection Opportunity Cost Direct Cost Bid/Ask Spread Long-term Decline in Spreads Post-Trade Market Impact Cost Depth at Quote, Reserve Size Commissions Fees Market Charges Taxes Execution Delay Market MovementBefore Execution Fast Execution Pre-Trade Market Impact Cost SuperMontageSM, Primex Source: Amihud, Yakov and Haim Mendelson, “The Liquidity Route to a Lower Cost of Capital’” Journal of Applied Corporate Finance, Volume 12, Number 4, Winter 2000, 8-25.

  9. SuperMontageSM Addresses Competitive Challenges TotalViewSM Detail

  10. Greater Depth, Stronger Center of Liquidity Source: NASDAQ.

  11. Greater Depth, Stronger Center of Liquidity • With more and more market makers submitting orders at multiple price levels, depth should continue to increase. Source: NASDAQ.

  12. Impact of Changes on Market Quality Price Dis- Improvement At the Quote Price Improvement • NASDAQ-listed S&P 500 stocks execute faster, with lower transaction costs and better pricing than NYSE comparables. Data represent execution quality for S&P 500 issues listed on NASDAQ vs. those listed on the NYSE Includes time for Market Center’s proprietary systems as mandated by SEC Rule 11Ac1-5. Based on all marketable orders up to 9,999 shares. Marketable orders are represented by both true market orders and limit orders that are at or within the prevailing bid-ask quote.Source: Market Systems Inc. December 2002.

  13. Improved Liquidity as a Result of Changes • More stock can be bought or sold on NASDAQ without impacting the price.  The Amivest Liquidity Ratio measures the amount of dollar volume of trading associated with a one percent change in price over a twenty-day period. Includes all domestic common stock on NASDAQ National Market and NYSE. Source: FactSet Research Systems. December 2002.

  14. Tomorrow’s Market • International Exchanges, Electronic Networks and Traditional Market Makers Compete for Every Trade. Bid Price Hong Kong. . . . . . . 25.00 Morgan Stanley . . . . 25.00 NASDAQ SIZE. . . . . . 25.00 Merrill Lynch. . . . . 24.95 Deutsche Börse . . . . 24.95 Instinet . . . . . . . 24.95 Spear Leeds. . . . . . 24.95 Singapore. . . . . . . 24.95 . . . Offer Price Goldman Sachs. . . . . 25.05 NASDAQ SIZE. . . . . . 25.05 Hong Kong. . . . . . . 25.10 Schwab Capital Mkts. . 25.10 CS First Boston. . . . 25.10 Tokyo. . . . . . . . . 25.10 Merrill Lynch. . . . . 25.10 Salomon Smith Barney . 25.15 . . .

  15. Fair Allocation of Regulatory Costs • Increasing Fragmentation of the Market for Trading NASDAQ Securities • Need to Rebalance the Costs of Regulating that Trading

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