Commentary

Anne Plested
Traders Magazine Online News

Bottlenecks Ahead

Anne Plested, head of Fidessa's EU Regulation Change programme, has written a short blog arguing that although we should be thankful that ESMA have taken a pragmatic approach to moving things along, more bottlenecks could appear in the future.

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June 4, 2007

Brokers Gain from NYSE's TRF Pass Through Rebate

By Peter Chapman

NYSE Euronext, in a move that could impact Nasdaq and other exchanges, has thrown a ringer into the business of facilitating broker-dealer prints.

The big exchange just started operating a trade reporting facility with the NASD. In a surprise move, it has decided to pass through 100 percent of the tape revenues it receives via the TRF to the broker-dealers that print to it.

Initially, the New York, like other exchanges that have established TRFs, planned to split tape revenues 50/50 with the reporting brokers.

The change to 100 percent was "necessary for competitive reasons," the NASD told the Securities and Exchange Commission in a filing. "As a new and late entrant to the OTC trade reporting arena, competitive pricing can differentiate its product offering."

TRFs have been established by several exchanges with the NASD over the past two years as a place for broker-dealers to print their off-board trades. Nasdaq operates the biggest TRF, as most market makers print to it.

When asked why the New York would operate the TRF without receiving any revenue, a spokesperson declined to comment. Other sources, however, note that a TRF is a must-have for exchanges as they try to offer multiple services to broker-dealers.

Indeed, NYSE Euronext chief financial officer Nelson Chai, speaking at last year's Merrill Lynch Banking & Financial Services Conference, told attendees the exchange established the TRF to "make sure that we can continue to capture the trading out there and meet all the customer needs."

The NASD/NYSE TRF launched with a big customer: BATS Trading. The ECN has added the TRF to its list of printing facilities, which include the National Stock Exchange and Nasdaq.

On some days BATS prints 100 percent of its trades to the NASD/NYSE; on other days, less. "We print there quite a bit," said a BATS spokesperson, "but we like to spread it around."

The spokesperson added that BATS opted to go with the NYSE because it likes to see competition and that the 100 percent rebate "doesn't hurt."

The first TRF was established by Nasdaq a few months after it won exchange status in January 2006. Nasdaq's TRF began operating in August 2006. The move allowed Nasdaq to continue to earn tape revenues on trades done off-board by broker-dealers.

The vast majority of off-board trades are reported to Nasdaq by market makers. And, by volume, those trades account for about one-quarter of all Nasdaq trades.

It is possible the move by NYSE Euronext could severely pinch Nasdaq's revenues, if market makers were to desert Nasdaq en masse or Nasdaq was forced to share a higher percentage of its tape revenues. Nasdaq would not comment.

That the New York would refuse any portion of TRF-related tape revenue is not a complete surprise. The Big Board protested vigorously when Nasdaq proposed the idea to the SEC as part of its petition to become an exchange.

The New York maintained-and apparently still does-that "since dealer-internalized trades do not contribute directly to price discovery, the ideal resolution would be to remove such trades from the revenue sharing formula."

The Big Board changed its mind and chose to launch a TRF of its own, it has said, to be able to compete with other exchanges.