Nasdaq OMX plans to make it easier for market makers to publish quotes on its Nasdaq Options Market by making available new technology. At the same time, the exchange operator will expand and tighten market makers’ quoting requirements.
"This will attract new liquidity from market makers who previously weren’t posting two-sided markets," Ellen Greene, a vice president in Nasdaq’s transaction services group, told Traders Magazine. The changes are slated to become effective in the third quarter, pending approval from the Securities and Exchange Commission.
Many of the market makers expected to start quoting on NOM are already quoting on Nasdaq OMX PHLX, NOM’s sister options exchange, according to Tom Wittman, a Nasdaq senior vice president in charge of U.S. options markets. These firms also may be representing customer limit orders on NOM.
Nasdaq’s homegrown options exchange is one of the smallest with a market share of about 5 percent. The exchange operator is treating the upgrade as a major event, dubbing it "NOM 2.0." By introducing more quoting, Nasdaq hopes to generate more trading and therefore boost market share. Nasdaq’s approach is one of carrot and stick.
To entice market makers to quote on NOM, Nasdaq is incorporating three key pieces of technology into the exchange. First, it will make available the same quoting interface market makers use on the Phlx, making it easier for them to quote on both markets. Second, Nasdaq will give market makers the same risk management technology it supplies on Phlx, making it easier for them to pull out of the market if necessary. Finally, NOM’s market data interface will be similar to the Philly’s.
To a large extent NOM 2.0 represents an integration of the exchange with the Philly. "A market maker will have models that send quotes into the Philly," Wittman explained. "But he doesn’t have the ability to use that same model to send quotes into NOM. So we’re going to give them that ability."
If market makers do decide to quote on NOM, they will find their requirements greater than before. Most importantly, market makers will be required to quote by class, not by series. That means, for instance, they must quote all IBM calls and puts, not just the June 170 calls and puts, as they do now. Heretofore, what little market making was done on NOM was typically done in front month options in no more than three or four strikes, according to Wittman. Nasdaq also plans to limit spread widths to $5.00. Currently market makers can quote bids and offers as far apart as they like.
NOM, an order-driven, maker-taker exchange, was originally conceived as a marketplace for limit-order traders. In its rulebook, the word "quote" refers to an order, not something a market maker would post. Launched in 2008, the exchange was set up to compete against the traditional pro-rata exchanges dominated by market makers. The success of the maker-taker exchanges has been limited as market makers have shied away from them. Now both Nasdaq and BATS Options, one of the newer maker-taker exchanges, are attempting to bring more dealers into the fold.
For its part, BATS is trying to entice market makes by introducing a new directed order program that allows brokers to steer their customers’ orders to their market maker units trading on BATS. Jeromee Johnson, in charge of BATS Options, told the crowd at this year’s Options Industry Conference that market makers were crucial to the success of exchanges.
"One of the best ways we can compete as exchanges is to see who can provide the best market maker incentives," he said. "Market makers want greater incentives. And if you want to attract their business, you need to offer something different."
