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March 9, 2009

A First: NYSE Pays for Liquidity

By Nina Mehta

The New York Stock Exchange, for the first time in its history, will pay all market participants for providing liquidity to its market. The new pricing was scheduled to go into effect on March 2, pending regulatory approval.

In early February, NYSE Euronext announced the Big Board would switch its fee schedule to a 10-cent rebate per 100 shares for liquidity providers and an 18-cent take fee for liquidity removers. The old schedule had no rebate but had an 8-cent fee for those taking liquidity from the exchange's book. The new pricing maintains New York's 8-cent spread for transactions.

Colin Clark, vice president for strategic market analysis at NYSE Euronext, said NYSE's execution speed would also drop to under 10 milliseconds. He conceded that other markets remain faster than the NYSE, but said the improved speed represents "a substantial reduction to the execution speed that customers are experiencing today." Firms that value high fill rates and certainty of execution, he added, know they can get that on the NYSE as well.

From mid-November through mid-February, NYSE's Big Board-listed matched market share held steady at roughly 26 percent, after declining throughout 2008, according to Barclays Capital. Nasdaq, the second-largest market for NYSE names, saw its market share in those names decrease to around 20 percent, from 22 percent, over the same recent three-month period.

In Clark's view, the rebate-and-speed combination for NYSE participants will draw new liquidity providers to the exchange. "Algorithmic [players] with hidden posted-type strategies may now be more encouraged to use New York to provide liquidity," he said. Both dark and displayed orders qualify for New York's new pricing.

Still, net liquidity takers on the NYSE will see their costs rise as a result of the new pricing. Their fees will increase by 10 cents per 100 shares of liquidity removed from the book that isn't offset by a rebate.

Nasdaq OMX Group, wasting no time, immediately targeted those firms with aggressive new pricing. Days after the NYSE's pricing announcement, Nasdaq broadcast a new fee structure for Nasdaq OMX BX, its Boston market, starting in March. That market was re-launched in January.

The exchange operator kept Boston's 20-cent rebate per 100 shares, but dropped its take charge to 14 cents, from 22 cents. The new pricing represents the industry's largest inverted pricing gambit across U.S. equities. "It's the lowest take charge among exchanges," said Brian Hyndman, senior vice president in Nasdaq transaction services. "This is not a short-term strategy." Nasdaq was executing less than 10 million shares per day in January but expected its average daily volume to increase.

In discussing New York's fee changes, Clark noted that the new transaction schedule is an integral part of the exchange's "new market model," which rolled out last fall. The new market model granted designated market makers (formerly specialists) new financial and trading incentives to provide liquidity, and created a class of competitive market makers called supplemental liquidity providers.

The pricing changes also come on the heels of more-recent developments at the NYSE. The exchange last fall enabled all customers, instead of just floor brokers, to submit non-displayed orders with no minimum displayed size, making the exchange friendlier to non-displayed orders. In addition, the exchange in January launched New York Block Exchange, a dark pool facility within the NYSE market.

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