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10/05/2012 19:40:00

UPDATE: Nasdaq Details Plan To Strike Back At 'Dark' Trading

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--Nasdaq OMX crafting new trading functions aimed at retail, institutions

--Plans represent efforts to claw business back from "dark pool" venues

--High-frequency trading becoming less significant on Nasdaq markets

(Updates with comments from Nasdaq OMX executive, details on planned trading strategies, background on U.S. stock market.)

By Jacob Bunge

Of DOW JONES NEWSWIRES

Nasdaq OMX Group Inc. (NDAQ) is planning a range of new stock-trading services designed to strike back at private trading platforms like "dark pools," escalating the competition for stock orders of retail-level traders and institutional investors.

The New York exchange group in the coming months will roll out new strategies for buying and selling large chunks of stock and introduce split-second electronic auctions geared to improve the prices that individual investors receive on their stock trades, senior executives said Thursday.

The moves are geared toward recapturing share-trading business lost to banks and trading firms that run private stock markets that in many cases have become the first stop for orders of mutual funds and retail brokerage firms seeking to minimize the cost of doing business in the U.S. stock market.

"These are products that are really designed to take flow back from dark trading," said Eric Noll, head of transaction services for Nasdaq OMX, speaking to investors at a presentation in New York on Thursday.

Nasdaq OMX and other exchanges have ceded ground to dark pools over the past three years, as the overall level of stock trading has diminished and volatility generally has declined. Those factors have made it easier for institutions like mutual funds to complete big trades away from exchanges, because publicly available prices are less likely to quickly shift away from those being offered on private platforms.

Earlier this year the level of off-exchange stock trading crested above 34% of the U.S. market, and this month stands at approximately 32%. Nasdaq OMX's overall market share currently stands at 22%, according to data from BATS Global Markets.

The efforts outlined by Noll on Thursday, which require approval from regulators before they can be introduced, could collectively add as much as 10% to Nasdaq OMX's market share, he said.

The company's planned "retail investor auction" program would counter a similar proposal put forth by rival NYSE Euronext (NYX) late last year. Both moves seek to pull individual investors' trading back onto exchanges.

The Nasdaq OMX program would run competitive "auctions" among market-making firms throughout the day in an effort to give an investor seeking to sell shares a higher price, or provide a lower sale price for a retail trader aiming to buy stocks. The auction idea draws from the options market, where exchanges run similar programs, Noll said.

By July, Nasdaq OMX separately aims to introduce a range of trading strategies that mimic those offered by brokers to institutional clients, designed to parcel out big stock orders to avoid tipping off faster-moving traders who could rapidly drive the price of the shares being transacted higher or lower.

"We're going to do it cheaper than [broker-dealers] can do it and offer it in a quick, transparent way to the customer base," Noll told investors. If investors pick up on the strategies, it could add 3% to 7% to Nasdaq OMX's slice of the U.S. stock market, he said.

Nasdaq OMX is refocusing on the business of individuals and institutions at a time when Noll said that high-frequency trading firms are becoming less significant players on the company's markets.

Wall Street banks like Morgan Stanley (MS), Bank of America Merrill Lynch and Barclays PLC (BCS, BARC.LN) have now taken the lead role in providing liquidity to Nasdaq OMX's platforms, a reversal from five years ago when high-speed proprietary traders were the main suppliers of prices, according to Noll.

High-frequency firms, meanwhile, have trimmed their business due to a broad decline in volatility, he said. Rapidly fluctuating prices provide a key venue for fast-trading firms to make profits.

"We're seeing [high-frequency trading] become a less and less important part of our business," Noll said. "To a large extent the marketplace is maturing."

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com; Twitter: @jacobbunge

(END) Dow Jones Newswires

May 10, 2012 13:40 ET (17:40 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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