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Nasdaq OMX Recasts Smaller Stock Exchange to Draw ETF Volume

Nasdaq OMX Group Inc. (NDAQ) is recasting one of its three stock exchanges as a venue focused on exchange- traded funds and similar products, according to the company.

It will adopt trading rules used on Nasdaq Stock Market and another equity exchange it owns for Nasdaq OMX PSX, the New York-based company said in an announcement today. It also plans to introduce incentives for member firms to provide competitive quotes in exchange-traded products and make more shares available to investors.

Firms supplying bids and offers that meet specified quoting thresholds can get bigger trading rebates than other participants, Nasdaq OMX said in a notice on its website today. The exchange also plans to add a so-called lead market-maker program to spur competition, it said.

“PSX is a key piece of our larger strategy to better service the ETP industry with a platform designed to incent high-quality liquidity, market incentive programs and ETP specific functionality,” Eric Noll, executive vice president of transaction services in the U.S. and U.K. for Nasdaq OMX, said in the announcement.

The plan for Nasdaq OMX PSX echoes the structure at NYSE Euronext, which has a specific venue, NYSE Arca, geared toward exchange-traded products. Nasdaq OMX told the Securities and Exchange Commission that its previous model, which used rules that sought to reward larger orders, was “only marginally successful in garnering market share.” The exchange had 0.74 percent of average daily U.S. equities trading this year, according to data compiled by Bloomberg. The SEC approved its new structure on April 25.

The PSX exchange introduced a market in 2010 that assigned a larger share of incoming trade requests to firms supplying bigger orders at a specific price. When it restarts trading on May 1 it will match orders according to what’s called price-time priority, in which orders first in line at a specific price trade before those that followed them.

Unlike NYSE Arca, the PSX venue doesn’t list securities. It has no plans to do so, Nasdaq told the SEC in its March filing.

The exchange will allow member firms to register as market makers and will introduce new order types, or sets of instructions that specify how a buy or sell request will be handled by the market, it said in March.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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