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October 4, 2007

NYSE Arca Targets Nasdaq Flow

By Nina Mehta

NYSE Arca altered its pricing this month in a bid to bolster its flagging share of Nasdaq-listed volume. But the effort to boost its share, which has slid over the last year, may not prove as effective as NYSE Arca hopes, according to market participants.

As part of NYSE Euronext's broader pricing changes, NYSE Arca dropped its take fee for Nasdaq securities to 25 cents for 100 shares, from 30 cents. Its rebate for liquidity providers remains 20 cents. This shift, which was due to take effect on October 1, narrows NYSE Arca's transaction spread to 5 cents from a dime.

"We thought it was more important, rather than to raise the liquidity provision number, to reduce the charge for taking liquidity," said Duncan Niederauer, president and co-COO of NYSE Euronext, at a recent Lehman Brothers conference.

The pricing shift met with some skepticism. "I'm not sure what the Nasdaq [pricing] change gets them," said Jamie Selway, founder and managing director at institutional broker White Cap Trading. "It's a rate cut, but it's not equivalent to Nasdaq or BATS." Selway speculated that NYSE Arca's matched share of Nasdaq-listed flow could increase a couple of percentage points. However, "the notion that this is going to challenge Nasdaq is probably a stretch," he said.

NYSE Arca's August matched market share for Nasdaq-listed securities was 16.3 percent, down from 21.3 percent a year earlier.

Nasdaq has volume-based pricing tiers for both price takers and makers. Its best pricing for large member firms is a 25-cent rebate and 26-cent take fee, leaving the exchange with just a 1-cent spread. Nasdaq's base pricing is a 20-cent rebate for adding liquidity and a 30-cent take fee. The exchange's matched market share for Nasdaq-listed securities was 48 percent in August.

BATS, which has no tiers, rebates 22 cents for liquidity providers and charges 24 cents to liquidity takers. The ECN had 8.9 percent of matched Nasdaq-listed volume in August.

Joe Ratterman, president and CEO of BATS, said NYSE Arca's pricing move isn't likely to win the exchange additional market share. "For Nasdaq-listed stocks, lowering the takeout rate and not increasing the liquidity rebate will not increase their market share, because liquidity-adders generally don't like to add at 20 cents," he said. "They'd possibly miss the sweet spot on both sides of the trade necessary to create the momentum they need."

Given the current pricing dynamics, "if they are going to settle on a 5-cent spread, then a 22/27 model might have made more sense," Ratterman suggested.

Several large brokers observed that NYSE Arca's pricing was geared to smaller and mid-tier brokers that do not qualify for Nasdaq's pricing breaks. Large brokers, they all said, are unlikely to find the new pricing more appealing than Nasdaq's.

NYSE Euronext's Niederauer doesn't disagree. He estimated at the Lehman conference that about 40 percent of Nasdaq-listed volume on Nasdaq comes from firms at the top pricing tier. "So the other 60 percent … is either paying 28 or 30, versus 25 [cents]." He said that NYSE Arca's pricing would present "an interesting dilemma" for Nasdaq.

By late September, Nasdaq had not altered its pricing or volume tiers in response to NYSE Arca's moves.