Late Monday afternoon the operators of the National Stock Exchange (NSX) notified its members of the exchanges intention to adopt a taker-maker price fee schedule for all securities priced above a dollar starting February 18. This decision is pending regulatory approval by the US Securities and Exchange Commission (SEC).
The new schedule will be identical to the current CBOE Stock Exchange (CBSX) schedule, according to Bill Karsh, a special advisor at the NSX. We believe the schedule will prove profitable and grow liquidity once its deployed by the NSX, he told Traders.
The CBSX acquired outstanding interest in the NSX in January 2012 after announcing its purchase plans in late September 2011. The exchanges operate separately with the CBSX relying on Chicago Board Options Exchange (CBOE) to administer regulations while the NSX operates as a separate self-regulating organization (SRO).
If the SEC approves NSX request, which was filed on January 16, the NSX will be the fifth US equities exchange to adopt inverted pricing after the CBSX, Direct Edges EDGA exchange, BATS Global Markets BYX exchange and Nasdaq OMX.
Unlike BATS, Direct Edge and Nasdaq OMX, NSX currently does not have multiple protected quotes, which could be used balance an inverted fee schedule with a typical maker-taker model.
The current stratified CBSX schedule begins with a rebate for taking liquidity at 15 mills and topping out at 17 mills while the fees for posting liquidity starts at 18 mills and falls to as low as 12 mills depending on a members transaction volume.
Is It Enough?
An inverted fee schedules was a novelty when it was first introduce by BATS Global Markets because no one ever saw it before, according to Sang Lee, co-founder and managing partner of industry analyst firm Aite Group. Since then, exchange operators have usually used it to purchase market share, he adds.
I would have a hard time believing that an exchange would be able to hold on to any additional liquidity gained through a taker-maker model in the long run, said Lee. We have very competitive markets where the transaction costs are already low to begin with, but I have been wrong before.
NSXs Karsh acknowledges that the stock exchanges that use a taker-maker model usually have much lower daily share volumes than those using maker-taker. Amongst BATS, Direct Edge and Nasdaq OMX BX, they usually have a combined volume of approximately 450 million shares traded daily while the CBSX averages between 40 and 42 millions shares, he said. Our goal is to eventually reach between the high 50s and 60 millions shares traded daily.
The NSX faces a steep challenge reaching its targets transaction volume since officials from LavaFlow ECN announced on December 4, 2013 that the ECN would start routing its top-of-book order flow to the Financial Industry Regulatory Authoritys (FINRAs) Alternative Display Facility (ADF) also starting on the February 18. Prior to its decision to move, LavaFlow had been NSXs largest liquidity provider, sometime responsible for up to 70 percent of the exchanges liquidity, according to Karsh.
NSX officials expect that the new aggressive pricing schedule and the fast performance of the exchanges matching engine will help put NSX at the top of most order-routing tables, he added.
