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Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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January 1, 2007

The Regionals Rework Prices

By Peter Chapman

The nation's four regional stock exchanges, despite facing fierce competition, reinvented themselves at the end of last year with new trading platforms and new business models.

The Boston Equities Exchange, the Chicago, National and Philadelphia stock exchanges all debuted ECN-like trading systems in support of their new plans to compete head-on with the primary exchanges for order flow.

Spurring the exchanges' transformations from manual, specialist-controlled entities to open book electronic platforms is Regulation NMS.

The Securities and Exchange Commission's sweeping new rule-set, to take effect this year, levels the playing field, vesting power with the market center that offers the best prices.

Winning in the new environment however is unlikely to be easy. The reborn regionals face five well-capitalized players already duking it out for Nasdaq and NYSE-listed flow with aggressive pricing tactics. NYSE Group's two stock exchanges are bidding for flow against Nasdaq and the BATS and DirectEdge ECNs.

The four regionals are owned by major Wall Street firms, but there is no assurance they will win their flow. The broker-dealers all maintain that best execution' standards will dictate their order routing practices.

As Traders Magazine went to press, the exchanges' revamps were in various stages of completion. Boston and Philadelphia offered trading in both Nasdaq and listed issues. Chicago and the National offered trading in Nasdaq, but not listed, stocks. Some offered outbound routing. Some didn't.

All plan to offer so-called trade reporting facilities to enable broker-dealers to report their internalized, or off-board, trades. Only the National has a TRF. The National hopes to differentiate itself with its courting of ECNs. The exchange has signed up BATS and Track ECN, offering them quoting and order delivery services.

The regionals have made public their pricing schemes. The Philadelphia, going the conventional route, is charging liquidity takers 30 cents per hundred shares and rebating liquidity providers 20 cents.

The Boston and the Chicago are taking more aggressive tacks. Both are charging liquidity takers just 28 cents per hundred shares while paying liquidity providers 23 cents for orders in listed securities and 25 cents for orders in Nasdaq names.

The National's plan may be the most aggressive. It intends to both charge liquidity takers 30 cents and rebate liquidity providers 30 cents, equalling a zero spread.