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Jared Dillian
Traders Magazine Online News

Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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January 1, 2007

Big Board Faces Renewed Battle for Order Flow

By Peter Chapman

The battle for listed flow among the exchanges is heating up.

In the wake of the New York Stock Exchange's move to increase its prices for trading on its hybrid platform last month, other exchanges are rolling out new pricing schedules in a bid to draw flow their way.

Nasdaq, the Boston Equities Exchange, the National, Chicago and Philadelphia stock exchanges, as well as Big Board sister company NYSE Arca, are introducing ECN-pricing tactics to garner market share in NYSE-listed flow.

Last month, the Big Board eliminated the $750,000 monthly trading fee cap paid by its largest members. At the same time, it increased its prices to both take and provide liquidity in its hybrid market to 2.75 cents per hundred shares from 2.5 cents.

The New York's largest client, Nasdaq, felt the pinch and immediately increased the fee it charges its customers to route orders to the NYSE from 2 cents to 2.25 cents. Nasdaq's customers get that rate if they allow their orders to check Nasdaq's matching engine first, which most do. If not, they pay more.

Nasdaq's business of routing orders to the New York, however, could become a sideshow to the bigger game of encouraging liquidity providers to post orders on its own matching engine.

This month Nasdaq is making its pricing schedule for listed trading the same as its schedule for Nasdaq shares. Its basic take fee for both Nasdaq and listed trades is now 30 cents per hundred. That's up from 15 cents on the listed side. Perhaps more noteworthy, its basic rebate is 20 cents, up from zero.

The four regionals (see accompanying article) have instituted similar schedules as has NYSE Arca. The Big Board's sister company already accounts for about 10 percent of all share volume in NYSE-listed names.

(The New York itself does about 60 percent while Nasdaq and a few internalizing market makers account for the rest.)

The big question now is where the liquidity providers will place their limit orders. At 2.75 cents, NYSE-hybrid is still the cheapest place in town to take liquidity, but it also charges 2.75 cents to those who provide liquidity. All the other exchanges pay providers about 20 cents for their orders.

"If all the providers of liquidity go elsewhere," said one upstairs trader, "there will be nothing left to take on the New York."

Market Share: NYSE Stocks

December 19, 2006

Billions of shares

NYSE 1.560 58.3%

Nasdaq 0.803 30.0%

Arca 0.273 10.2%

Other 0.041 1.5%

Total 2.677 100%