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July 15, 2007

The Boston Fee Party

New Pricing Maneuvers Aim for Flow

By Nina Mehta

Taking a page from the aggressive pricing gambits of BATS Trading and other market centers, the Boston Stock Exchange has dramatically altered its pricing. In June the BSE sliced the take charge on the Boston Equities Exchange to 5 cents for 100 shares, from 28 cents. At the same time, it eliminated its 27-cent credit per 100 shares for liquidity providers. "We want our take fees to put us at the top of brokers' routing tables," says C. Thomas Richardson, BeX's president.

BeX is the trading facility formed last year by the BSE and five large broker-dealers, including Citi and Credit Suisse. The BSE, as a self-regulatory organization, oversees BeX, whose market share for listed stocks is less than 1 percent.

The exchange's radical pricing change is reminiscent of BATS's move in spring 2006, when it slashed its rebate and take fee to 14 and 15 cents, respectively, from 25 and 26 cents. That move backfired, as limit-order traders stayed away.

Boston's new pricing makes it the second-cheapest place to grab liquidity, after the New York Stock Exchange. Other exchanges and ECNs have take charges that range from 23 to 30 cents for 100 shares.

"Exchanges that aren't doing much volume are trying to get traction," says Dave Cummings, chairman and founder of BATS Trading. "This is a good thing for a less active market to try." He adds that BATS doesn't plan to alter its pricing.

The BSE told the Securities and Exchange Commission that its new pricing "will attract volume to BeX by encouraging those firms with a high percentage of taking order flow to make BeX their chosen routing destination." The extremely low take charge, the exchange added, will impel liquidity providers "to provide competitive quotes on BeX with the higher probability of getting an execution."

The lack of a liquidity rebate may seem off-putting to some. However, Richardson says, BeX is talking to the SEC about the possibility of providing "an innovative transaction-based rebate program" for its biggest liquidity providers each month. That could encourage firms to post limit orders on BeX.

A broader reason behind the BSE's aggressive pricing could be the exchange's demutualization plan. It expects to complete the transition to a for-profit corporation this year. An increase in BeX's market share and fee revenues could improve the BSE's prospects.