By James Langton

(January 8 – 16:40 ET) – Nasdaq is defending its trading execution quality in the wake of a report from the Securities and Exchange Commission that compares it unfavourably with the New York Stock Exchange.

SEC chairman Arthur Levitt will deliver a policy address concerning the framework of the National Market System at 17:30 PST today at Stanford Law School, and the report will be released later this evening.

Nasdaq president Rick Ketchum said, “We agree with the SEC’s introductory ‘important caveats’ that there is no single, all-encompassing measure of execution quality, that their sample is limited, and that their matching approach did not account for possibly important factors. Ignoring such factors as the type or age of a company could significantly change the conclusions.”

“First, among the ‘very large stocks,’ representing over 40% of Nasdaq trading activity, the report showed the effective spreads are ‘nearly equal’ across the markets” said Ketchum. “Their data actually showed that Nasdaq stocks in this category had lower spreads by an average of 1.2¢ a share — though they did not consider that difference to be statistically significant.”

Ketchum noted that Nasdaq spreads have dropped by over 75% since 1996. “Second, market order executions were found to be ‘generally faster’ on Nasdaq than the NYSE for 100-499 share orders. Since this is an order size frequently used by retail investors, we are pleased to see this finding.”

“Interestingly, our read of their analysis suggests that the more competition that exists to execute an order, the better the result for investors.” Ketchum argued that this result favours Nasdaq because it links market makers and ECNs [electronic communications networks], and allows them to compete for orders.

Ketchum listed several concerns about the reporting methodology used. He said the SEC report overly focuses on effective spread as the singular measure of execution quality. Nasdaq believes this is a narrow view that doesn’t present the true picture of today’s markets. “Execution quality is multi-dimensional with many important factors to measure including spreads, trading cost, speed of execution, liquidity, and transparency. Nasdaq excels on all these criteria,” said Ketchum.

He also suggested that, “Company comparisons were not always apples to apples,” arguing that Nasdaq stocks tend to be younger and more volatile. “It is important to emphasize, however, that these differences are in the companies themselves, not differences in the trading venue.”

Ketchum concluded by saying that execution quality is a primary concern at the Nasdaq, and he defends Nasdaq’s record in liquidity and trade execution. “Speed and spreads are but a few of the many important dimensions of execution quality. Market improvement in all the dimensions has resulted from intense competition, providing investors quality execution in quantities never before imagined.”