Nasdaq, hoping to drive order flow to its struggling intraday crossing system, will pay traders for their orders during the month of September.
“We will offer rebates on both sides of the market,” Brian Hyndman, a senior vice president in Nasdaq’s transaction services group, said at a press conference yesterday. “So we are willing to lose money in the month of September in order to get critical mass.”
Nasdaq will pay traders 10 cents per hundred shares for using its three intraday crosses as well as its after hours cross at 4:30 p.m. The deal is good for the month of September only. It was first announced two weeks ago in a memo to head traders.
The dark pool, which competes with many others, launched about 14 months ago. Access has been free ever since. On Oct. 1, trading will revert back to free. Nasdaq’s long-term goal is to charge traders “utility pricing” of about $0.0005 per share, Hyndman said.
Nasdaq is not the only dark pool operator to pay for flow: Aqua Equities, owned by eSpeed and Cantor Fitzgerald, pays 25 cents per hundred shares to suppliers of liquidity.
Nasdaq’s system, built at little cost and in response to broker-dealer demand, according to Hyndman, has never gained much traction. While “hundreds of millions” of shares are deposited in the crosses, Hyndman told Traders Magazine, only about a couple hundred thousand shares match every day.
Many of the largest institutional brokerages operate their own dark pools or are members of consortia pools and would prefer to run their institutional orders through those systems.
Hyndman admits this limits Nasdaq’s crossing potential “a little,” but adds that “these things take years to grow. It’s really tough to hit a home run in the crossing world.”
It may be impossible. Sang Lee, co-founder and managing partner at Aite Group, believes Nasdaq will have a hard time getting anywhere with a rebate strategy. “If they weren’t able to get people to participate when it was free, I’m not sure upping the ante with rebates will solve the problem,” he says.
Lee holds that there are too many dark pools for traders to choose from. Also, once a trader has tried to get a fill in a dark pool but found no liquidity, he is unlikely to return.
“Instead of a virtual cycle where liquidity begets liquidity, here we have a vicious cycle where no liquidity begets no liquidity,” Lee says. “Once people become skeptical about the amount of liquidity you have in a platform, you will have a tough time.”
In a related development, Nasdaq has decided to shelve, for now anyway, its plans to offer a continuous cross. Hyndman says Nasdaq had problems getting Securities and Exchange Commission approval for the platform due to disagreements over price-and-time priority issues.
