The next phase, which could have a significant impact on many index fund managers, is expected in March. Nasdaq plans to release a single price closing cross. A single price opening cross is then expected to follow sometime in Q2 or Q3 of 2004.
'An index fund is beholden to the index as to the value of that index, and need to track that index at its closing price," said Adena Friedman, executive vice president of Nasdaq Strategy and Data Products, in an interview. "Most index fund managers have found that Nasdaq market prices are a better indicator of the market than consolidated pricing that just provides information on the last trade, although that might not reflect what the market was actually doing at the close. Therefore most index portfolio managers are already using Nasdaq closing prices. Now we are giving indexers the opportunity to guarantee their trade at that Nasdaq closing price.'
With the new crossing system, Nasdaq will take closing orders up until 3:50 and then will provide frequent (every 30 seconds from 3:50 up to every 5 seconds in the last minute before 4:00 p.m.) information on what the market is doing. There is an initial cross of agreed trades. The Nasdaq then posts the 'imbalance' (more want to sell than buy, say) and market participants (in this case sellers) come in on the other side of the imbalance until the price is found. At 4:00 p.m. they close for all orders and everything is executed at the uniform closing price.
By way of comparison, the NYSE currently takes orders until 3:40 & then sends out imbalance indicators at 3:40 and 3:50 only.
While the closing price is widely used by index portfolio managers who wish to track the market, as well as active portfolio managers who measure their performance based in index performance, the opening price is used regularly as a reference price for large orders (e.g., market-on-open) and the settlement price for derivative products. Until now, the industry practice has been to use the first, last-sale-eligible consolidated trade as the de facto opening price. These prices are, in some cases, unrelated to the prevailing market in the security due to the arbitrary nature of the designation.
With market-on-close (MOC) orders, an investor can place an order with the a broker before 3:50 pm and be assured that the order will be executed at the closing price. However, this is not a guarantee of the price at the time of the order or of any specific number, just that the trade will be at the closing price. For many index investors seeking to match the index as closely as possible, this is an important and very useful approach.
"The Nasdaq closing cross is really an opportunity for all of our participants to trade at a single closing price that best reflects the market,' said Friedman.
Nasdaq originally said it would was considering the system after Standard & Poor's announced that it was turning to the American Stock Exchange for a pilot program to provide closing prices for Nasdaq stocks in S&P 500 index. However, S&P announced it had delayed the start of the pilot, scheduled for Dec. 1, after the Financial Information Forum raised concerns over the plan in letters to S&P and the Securities and Exchange Commission, and Nasdaq raised objections in a letter to the SEC.
- For more on the Nasdaq open/close enhancements, see http://www.nasdaqtrader.com/trader/openclose/openclose.stm
- For Nasdaq's Fact Sheet on the opening and closing enhancements, see http://www.nasdaqtrader.com/trader/openclose/factsheet.pdf
- For Nasdaq's Presentation detailing the opening and closing enhancements, see http://www.nasdaqtrader.com/trader/openclose/presentation.pdf