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December 16, 2011

Low Volume Sparks Exchange Price War!

Top Stories in 2011

By Peter Chapman

With volume slumping for the second year in a row, the industry's major stock exchanges competed aggressively for brokers' business.

That meant cutting prices.

And, in the world of stock exchanges, price cuts translate into higher rebates. This year, the exchanges introduced new rebate programs and sweetened the terms of existing programs.

They added new rebate tiers, reduced the volume thresholds necessary to qualify for higher rebates and, simply, increased rebates. The upshot was to make it easier for liquidity providers to qualify for higher rebates. And while most of the liquidity providers are market makers and other high-frequency trading types, the exchanges looked to broaden their source of supply by creating rebate programs that appealed to nontraditional suppliers such as retail and institutional brokerages.

"They are looking to add more flow to their platforms that is not high-frequency in nature," Pankil Patel, a managing director of trading at Credit Suisse, told Traders Magazine earlier this year.

"It's important for [the exchanges] to get a good mix of flow in the door," Pankil added. To that end, Nasdaq expanded its "Investor Support Program," while NYSE Arca created a similar program called "Investor Tiers."

Perhaps the most dramatic move came from BATS Global Markets, which had previously kept its pricing simple. Eschewing its "flat" pricing model, BATS tiered the pricing on its flagship BZX exchange in July. More liquidity now garners higher rebates.

Much of the rebate activity occurred in the first half of the year, when average daily volume was trending at 7 billion to 7.5 billion shares. That was down from a run rate of 8.4 billion shares in 2010 and 9.8 billion in 2009.

The business turned around in August as concern over Europe's debt crisis roiled the stock market, producing a run rate of 8 billion shares through October.

Still, despite the recovery, the exchanges did not reverse course and kept tinkering with their rebates.

In November, for instance, Nasdaq launched a new program for firms that do a lot of trading before the open. It added a new tier to a program targeting big takers of liquidity, and it tweaked its Investor Support Program. All the steps taken give more traders more opportunities to qualify for higher rebates.

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