Nasdaq: internalizers ‘r’ us

By: Ray Pellecchia

File Under: NYSE

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Last week, The New Market Machines Newsvine "wire service" picked up Nasdaq’s claims of purported gains in share of trading vs. your humble blogger’s favorite market (article already seems to have faded from current view, and I can't see a way to pull it back up). Dow Jones Newswires (subscription only) reported on the same subject but included the following cautionary quote from my colleague down the hall:

"’The vast majority of Nasdaq's volume for this unique trading event represented a significant amount of internalized trades that were arranged away from the central market and merely reported on the tape by Nasdaq,’ said NYSE spokesman Richard Adamonis."

I am not going to quibble with Nasdaq’s claimed numbers, though based on past experience I have no reason to believe them. But numbers notwithstanding, it sounds to me like Nasdaq’s success with respect to NYSE-listed stocks lies far more in becoming a print facility for trades that take place elsewhere (read: internalized) than in creating a center of liquidity itself.

And what’s wrong with internalization? You’ve already heard us lecture on it; don’t take our word, here’s The Wall Street Journal's Kate Kelly (article costs $2.95) on the subject a couple of years ago – a story that regrettably was not picked up elsewhere. Here's the lede:

"JOE GUMINO IS often irritated by the sort of experience he had on Wednesday shortly before 11 a.m.

"'I am always left wondering how much better of a price I would have received if my order had been displayed to the open markets,' Mr. Gumino says. A Fidelity spokesman declined to comment on the trade."

Once upon a time, Gretchen Morgenson, then at Forbes, and Scot Paltrow, then at the L.A. Times, uncovered collusion and other unsavory practices on the Nasdaq. Internalization appears to be getting a free pass.