The numbers are the story. In a time of commoditized trading, where brokers and active traders send their flow is affected by the price war being played out by exchanges and ECNs. And that war involves increasingly razor-thin spreads or, in the case of NYSE Arca, inverted pricing with higher rebates than take rates for its most-active customers.
This year’s main theme for exchanges was trying to hang on to market share, observed Sang Lee, co-founder of research firm Aite Group. The result “has been almost comical at times,” he said, with market centers unveiling new pricing, sometimes overnight, in response to price shifts by rival markets.
Most of the transaction-price jockeying took place in the first half of this year. Nasdaq gave up its complex, multi-tiered rebates and take fees based on volume levels and listing venue in favor of simpler volume-based tiers for National Market System securities. It kept the same 1-cent spread between the rebate and take fees it had last year for its best customers, but moved up the pricing scale to cater to rebate seekers.
NYSE Arca also moved up the pricing scale, but had to forfeit much more. The exchange had a penny spread in its pricing for Nasdaq stocks a year ago, but this year abandoned the nickel and dime spreads it had maintained in listed securities. That, in turn, gave way to inverted pricing for Nasdaq-listed names (in the spring) and NYSE-listed names (in the summer) in an effort to peel high-volume trading firms’ flow away from Nasdaq and BATS.
The NYSE had about 40 percent market share in its listed securities at the beginning of this year, and is now just under 25 percent. NYSE Arca went the other way, rising to 18 percent from 13 percent over the same period. With NYSE Euronext’s overall dominance in NYSE names eroding, chief executive Duncan Niederauer sounded glad, in an earnings call with analysts on Oct. 31, to finally be able to say that the firm’s NYSE-listed market share seemed to have stabilized around 42 percent.
Nasdaq, for its part, maintained its 29 percent market share for all NMS names from the third quarter of last year to the third quarter this year, but its share in its own listed securities slid to 41 percent. That’s down from 47 percent in the third quarter of 2007.
Like the New York, Nasdaq is now preparing to use multiple market models to cater to different customers. Last month it spread the word that the defunct Boston exchange would be re-launched as Nasdaq OMX BX in January. That market has no volume tiers and appeals to liquidity takers interested in its 22-cent take fee. Nasdaq, in contrast, appeals more directly to rebate seekers with its high 28-cent credit for its biggest-volume participants.
The exchange pricing aggression leveled off in the summer, just as market volatility and volume ramped up. “Some markets are almost fully compressed [in terms of the spread between the rebate and the fee], and some are inverted,” said Brian Hyndman, senior vice president in transaction services at Nasdaq OMX. “There are not a whole lot of moves left.”
For its part, BATS gained significant market share in 2008. The ECN-turned-exchange started the year by halving its spread to 1 cent, and continuing to cater to high-frequency trading shops. BATS’s NMS market share in October was 11.4 percent, up from 6.3 percent at the end of last year. “BATS didn’t have to go tit-for-tat in terms of changing their pricing every week,” Aite’s Lee said.
For broker-dealers surveying the markets, all the pricing skirmishes this year led to the apotheosis of smart order routing. Ruth Colagiuri, an executive in the global portfolio and electronic trading group at Merrill Lynch, told Traders Magazine several months ago that the profiles of exchanges’ order books changed every day this year as order flow moved around.
“This was basically a year where [trading] decisions based on market share were not enough,” she said. “If two markets are displaying at the same price, where we go to take liquidity and where we post are data-driven decisions, based on real-time statistics such as venue latencies and matching rates.”
As a consequence of competition between market centers, she added, firms must now look at heat maps of where stocks trade and use smart routers to access that dispersed liquidity.
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