Nasdaq is aiming to capitalize on a shift in strategy at the New York Stock Exchange through pricing changes at its newly launched Boston market.
When NYSE Euronext last week announced a new transaction fee schedule for the Big Board, starting in March, Nasdaq responded through Boston. The big exchange inverted Boston’s pricing, pushing its take fee below its rebate, effective March 2. Nasdaq had re-launched the Boston exchange, now called Nasdaq OMX BX, just weeks earlier, on Jan. 16. Before Nasdaq acquired Boston last year, that venue had been called the Boston Equities Exchange.
The NYSE Euronext plan kicks NYSE’s liquidity rebate up to 10 cents per 100 shares, from no rebate, and the liquidity take fee to 18 cents per 100 shares, from 10 cents. The goal was to offer a rebate to entice more liquidity to the Big Board while still reaping the benefit of having the lowest take fee among the main exchanges. New York also improved its execution speed to appeal to algorithmic traders.
In response, Nasdaq switched BX to inverted pricing in order to have the lowest take fee among exchanges. BX will continue to credit liquidity providers 20 cents per 100 shares. But starting in March, the exchange will charge liquidity takers 14 cents instead of 22 cents. Member firms that take as much liquidity as they provide will be able to pocket the 6-cent spread. That money comes out of Nasdaq OMX’s wallet.
“NYSE always had the lowest take-out charge,” said Brian Hyndman, senior vice president for transaction services at Nasdaq. “We’ll keep our rebate [as is] and offer a lower take-out than NYSE.” He added that this gambit to gain flow “is not a short-term strategy.” BX’s pricing applies across all U.S. equities.
“It’s a direct attack on the New York and their well-known cheap take fee,” said Matt Simon, an analyst at research firm TABB Group. “Boston’s fee will be 4 cents below New York, 11 below BATS, and 15 below Nasdaq. The appeal is to traders who want to pay less for a similar fill.”
However, while BX’s fee schedule may whet the chops of liquidity-taking firms conscious of their transaction costs, Boston currently has little liquidity on its book. This past Tuesday was the first day it traded more than 10 million shares. BX currently has 80 customers, but could add another 10 to 15 by March, according to Hyndman.
Simon noted that in the short term, inverted pricing usually attracts flow. “Traders will capitalize on the pricing differential,” he said. But he pointed out that an exchange can’t maintain inverted pricing indefinitely. “Whether the order flow continues to come in after the exchange goes back to more normal pricing will depend on how fast and valuable the liquidity was when [firms] interacted with orders on the exchange,” he said.
Boston operates with the same technology infrastructure and matching engine that Nasdaq uses. Unlike NYSE Euronext’s three equities markets, Nasdaq OMX’s two equities venues are not differentiated in their market models. Boston, in effect, is a replica of Nasdaq, minus the liquidity, range of order types and routing capabilities, but with different pricing that targets different constituencies.
