The New York Stock Exchange’s plan to introduce tiered pricing for traders that take liquidity, announced on Tuesday, is a bid to draw more volume from its largest customers, including high-frequency trading firms.
As the first pricing change since this past March, when the exchange began paying traders to provide liquidity, the move reflects a bolder Big Board that’s more confident of its abilities to take on its high-volume, high-speed, all-electronic competitors. This confidence was fueled, in part, by the exchange cutting its execution speed for orders to 5 milliseconds, even though its chief competitors remain faster.
"We’re making a change to introduce a volume tier that provides more-active firms with a reduced take rate," said Colin Clark, vice president for strategic market analysis at NYSE Euronext, the Bid Board’s parent company. This is the first time the exchange has tiered its pricing for customers. The exchange has made changes to its fee schedule in the last few years, but has not engaged in the aggressive pricing war that has raged among its rivals.
The NYSE’s pricing change follows execution speed improvements introduced with the recent implementation of the exchange’s new NYSE Super Display Book system for processing orders. The new platform, which replaced the SuperDOT order delivery system, has shrunk the execution time to less than 5 milliseconds. Customers get cancels back in less than 2 milliseconds. This speed improvement is important for latency-conscious firms.
Unlike previous pricing moves, this one does not appear to be an attempt to stem the NYSE’s loss of market share. NYSE Euronext’s market share of NYSE-listed securities was 39.9 percent in June, up 1 percentage point from May. In June 2008 it was 45.7 percent. According to analyst reports, the exchange operator appears to have halted the decline of its share of tape volume in Big Board securities in the last few months.
The New York’s volume-based tier for its biggest customers will launch next week. Those meeting the volume requirements will pay 17 cents per 100 shares to take liquidity from the Big Board, instead of the standard 18 cents. The take fee for NYSE-listed names at most other market centers ranges from 25 cents to 30 cents. (Direct Edge’s EDGA platform doesn’t charge most customers to take liquidity, while Nasdaq OMX’s Boston exchange gives participants a rebate.)
To receive the NYSE’s volume discount, firms must trade a daily average each month of 130 million shares. That volume must include a daily average of 30 million shares of liquidity added and an average of 15 million shares executed in the closing auction. Nasdaq, NYSE Arca and Direct Edge have pricing tiers designed to boost certain types of trading or the ratio of liquidity adding to liquidity taking. BATS Exchange does not have pricing tiers.
With the announcement of its new pricing, the NYSE also appears to be ending its days of giving away executions at the open in order to keep liquidity within its walls. In October 2007, facing incipient competition from Nasdaq’s electronic opening and closing auctions in NYSE names, and against the backdrop of its own declining market share, NYSE ditched its fee of 4 cents per 100 shares for trades at the open and allowed customers to execute for free. But starting next week, the exchange will charge customers 5 cents per 100 shares for trades at the open. The exchange will also institute a monthly cap of $10,000 for each firm’s executions at the open.
Market-on-close and limit-on-close orders will be charged 7 cents per 100 shares, up from the current 5 cents. Those firms that qualify for the higher-volume take tier will be charged 6 cents for their MOC/LOC orders. (There is no fee break for these firms at the open.) The current cap of $120 per trade at the close will also be eliminated. This will increase trading costs for large-size orders.
"There is potentially a beneficial effect for some firms if their taking activity is higher than their close activity," Clark said. However, those firms will also see the cap on their trades in the closing auction vanish and they will be charged for executions at the open.
NYSE’s pricing for its open and close now mimics Nasdaq’s pricing. Clark noted that his exchange’s pricing is "similar" to its main competitor’s. Earlier this month, Nasdaq increased its fee for orders sent into its closing cross to 7 cents per 100 shares. It charges a nickel at the open.
The NYSE’s new pricing goes into effect on Aug. 1. However, the exchange plans to raise the volume thresholds for big customers in September. It is starting with lower thresholds because of the "expected seasonal summer slowdown in trading activity," according to the pricing announcement.
