The New York Stock Exchange, for the first time in its history, will pay all market participants for providing liquidity to its market, according to NYSE Euronext, the exchange’s parent company. The announcement, which included changes to NYSE and NYSE Arca pricing, was made after the market closed today.
Starting March 1, NYSE will give those placing limit orders on its book 10 cents per 100 shares. The rebate applies to both displayed and non-displayed orders. Previously, firms received no credit for liquidity they brought to the Big Board. All other equity markets in the U.S. pay liquidity providers for their order flow.
In addition, the New York will boost its fee for liquidity takers. Takers will be charged 18 cents per 100 shares for removing liquidity from the NYSE. Currently, they pay 8 cents to take liquidity from the exchange. These pricing changes must be approved by the Securities and Exchange Commission.
Colin Clark, vice president for strategic market analysis at NYSE Euronext, said the pricing changes are an integral part of the so-called new market model rolled out by the NYSE last fall. The new market model granted designated market makers (formerly called specialists) new financial and trading incentives to provide liquidity, along with looser quoting obligations. The model also introduced a new class of participants called SLPs, or supplemental liquidity providers, who act as competitive market makers. They receive rebates to encourage them to provide liquidity and have minimum quoting requirements.
According to Barclays Capital, NYSE’s NYSE-listed matched market share has held steady at roughly 26 percent since mid-November, after declining throughout 2008. It was under 25 percent for most of September. Arca’s matched NYSE-listed market share dipped from about 17.5 percent in mid-November to just over 16 percent now. Nasdaq’s Big Board-listed share declined from over 22 percent in mid-November to under 20 percent.
The new pricing changes push the NYSE further down the path of change. “The new market model implemented last fall has been successful in encouraging liquidity-providing and improving our market share on the NYSE side,” Clark said this afternoon in a conference call with reporters. “We planned to change that pricing once we made speed improvements on the NYSE side. We also rolled out hidden orders, and this [pricing] complements that.”
Earlier in the fall, the exchange enabled all customers, instead of than just floor brokers, to submit non-displayed orders with no minimum displayed size. In addition, the exchange last week launched New York Block Exchange, a dark pool facility that enables customers to interact with liquidity on the New York’s book as well as liquidity that comes through BIDS Trading, a dark pool owned by a consortium of broker-dealers.
Along with the new pricing changes, NYSE Euronext said the Big Board’s execution speed would drop to under 10 milliseconds, which it described as a “significant” improvement. Clark conceded that other markets will remain faster than the NYSE, but noted that the improved speed represents “a substantial reduction to the execution speed that customers are experiencing today [on the NYSE].” Customers also value high fill rates and certainty of execution, he said, which they can receive on the NYSE. Clark added that Arca already trades in microseconds, like Nasdaq, BATS Exchange and others. Arca and the NYSE are on different technology platforms.
The shift in NYSE’s pricing schedule signals the triumph of maker-taker pricing and the decline of the old exchange model in which all comers pay for the privilege of accessing the exchange’s liquidity. In October 2007, the NYSE switched from a 2.75-cent fee per 100 shares for all participants to a zero rebate for liquidity providers and an 8-cent take fee. This latest move brings the NYSE’s pricing closer to that of its rivals.
Clark said the introduction of rebates for all participants could attract new liquidity providers to the NYSE. “Algorithmic [players] with hidden posted-type strategies may now be more encouraged to use New York to provide liquidity,” he said.
With these pricing changes, the NYSE will still retain an 8-cent spread between the take fee and the rebate. That spread represents the transaction fee income the exchange receives for most trades.
The NYSE’s new 10-cent rebate will continue to be the industry’s lowest rebate among the biggest exchanges. However, the Big Board will also continue to have the lowest take fee among those players. One of Direct Edge ECN’s two markets has a pricing model for most customers that charges nothing for providing liquidity and taking liquidity. But that market, called EDGA, had a matched market share of only 2.4 percent in NYSE-listed securities in December.
Other NYSE market participants will also see pricing changes in March. The take fees for DMMs will increase to 10 cents. DMMs currently pay nothing to remove liquidity, Clark said, because customers receive no rebate for providing liquidity. When the rebate that customers get rises to 10 cents, DMMs’ take fee will also rise to 10 cents. Clark said these are and will remain “break-even trades for the NYSE.”
SLPs will also see a change on the liquidity-taking side. SLPs are incentivized to provide liquidity through liquidity rebates. Currently, their rebate is 15 cents and their take fee is 8 cents. Their rebate will remain 15 cents in March, but their take fee will jump to 18 cents. However, Clark said, SLPs are “largely liquidity providers.” He added that “the genesis of SLPs was to bring additional liquidity providers to our marketplace, and to do that by offering higher rebates.” Consequently, higher take fees, in his view, are unlikely to affect the incentive to provide liquidity on the New York.
The NYSE will also increase floor brokers’ rebates to 12 cents per 100 shares, from the current 4-cent level. Floor brokers will pay 18 cents to take liquidity, along with other market participants. Their costs, as a result, will increase, although floor brokers typically provide more liquidity than they take. Floor brokers also have some trading advantages over other market participants.
As part of its pricing changes, the NYSE will also raise the transaction fee for market-on-close and limit-on-close orders to 5 cents, from 4 cents. It will keep its existing fee cap of $120 per trade. “That transaction fee is still very competitive,” Clark said. Orders at the open pay nothing.
NYSE Arca’s fee schedule also got a shake-up as part of NYSE Euronext’s transaction pricing revamp. Arca’s rebate and take fee for active customers will both move up 1 cent for Tape A and Tape C names (NYSE-listed and Nasdaq-listed, respectively). The rebate for those securities is now 29 cents per 100 shares if the customer takes, adds or routes a daily average of 90 million shares across all tapes, including the addition of more than 45 million shares. Previously, those customers received 28 cents, while all others were paid 23 cents. Firms that don’t qualify for the higher rebate will continue to receive 23 cents for providing liquidity.
Of the main markets, Arca will have the highest rebate for Tape A and Tape C names. Nasdaq’s highest rebate is 28 cents for those two tapes. NYSE Arca expects its new pricing to make its market a more attractive venue for liquidity providers. “We certainly expect the combination of a 29-cent rebate and a 20-cent rebate for [dark midpoint] orders to incent more order flow,” Clark said. A Nasdaq spokeswoman said this afternoon that Nasdaq has no plans to alter its fee schedule.
Arca’s fee for liquidity takers in Tapes A and C will be 28 cents in March, up from the current 27 cents. NYSE Euronext noted that Arca’s already-inverted pricing will remain in place for at least three months once the new pricing becomes effective.
Arca is also changing its pricing for dark orders that execute at the midpoint of the national best bid or offer. “Midpoint passive liquidity” orders in Tape A and Tape C securities will generate a rebate of 20 cents. Those hidden orders in Tape B names (securities listed on Arca and NYSE Alternext) will get a 10-cent rebate. The previous pricing was 15 cents or 10 cents, based on the customer’s average daily volume across the tapes.
