Nasdaq to pull out of old network

Nasdaq Stock Market Inc., the No. 2 U.S. stock market, plans to pull out of a 27-year-old system that links major U.S. markets, potentially helping to expand its trading of securities listed on the New York Stock Exchange.

Nasdaq will withdraw from the Intermarket Trading System, a common platform used to route some stock orders, and rely on its own privatively developed system. Under rules that will take effect next year, exchanges must be interconnected so investors can access the best price on electronic-stock trades.

"Everyone is under regulatory pressure to connect with each other, so something had to be done," said Sang Lee, managing partner at Boston-based consultant Aite Group LLC. "Since Nasdaq has come out and said they'll go their own way, everyone else is likely to follow suit."

Nasdaq in April started using a system developed by Brut LLC, which the company acquired in September 2004, to connect to other markets. The system has allowed Nasdaq to increase its market share of trading for NYSE-listed stocks by 5 percentage points to 19 percent because of speed and lower cost, according to Nasdaq.

The ITS, created in January 1978, connects eight stock markets and the Chicago Board Options Exchange so that brokers can route orders to any exchange. The system has come under criticism in the past because of its older, slower technology and changes to the system required unanimous approval from its nine members.

The new "network allows us to handle more trading activity in a more efficient way, and we have already seen the benefits of that," said Chris Concannon, Nasdaq's executive vice president, in an interview. "From the user's perspective, this will be a seamless process."

The Big Board, the No. 1 exchange, is expanding into trading of Nasdaq-listed stocks through its purchase of Archipelago Holdings Inc., which handled about 23 percent of Nasdaq stock trades last quarter. The transaction, announced in April, will transform the NYSE into a for-profit, publicly traded company called NYSE Group Inc.

Nasdaq will withdraw from ITS, pending an approval from the U.S. Securities and Exchange Commission, around June 2006, when the new rules governing electronic trading take effect, Concannon said.

The rules, known as Regulation NMS, would guarantee investors get the best price on all electronic-stock trades, and allow exchanges to create private links that may be cheaper to operate. The NYSE along with brokerage firms including Morgan Stanley supported private linkages during hearings on Reg NMS last year. An NYSE spokesman declined to comment on Nasdaq's announcement.