Exchanges Sharpen Their Offerings
Traders Magazine Online News, November 24, 2010
Who said the exchange business is a commoditized market? In the past two months, three of the seven exchange operators have rolled out new trading models that break with the ordinary. While most exchanges allocate trades based on price and time, and price their services under the make-take model, these players are toying with the parameters in hopes of winning order flow by changing trader behavior.
Nasdaq Thinks Big
On Oct. 15, Nasdaq OMX Group launched its Nasdaq OMX PSX marketplace using the license it obtained when it bought the Philadelphia Stock Exchange. "PSX" stands for "price-size exchange." Instead of allocating trades based on price and time priority, PSX allocates incoming orders to traders based on how much size they are quoting.
The bigger the quote, the bigger the allotment.
This pro rata allocation model borrows from the options exchanges, which reward market makers with a maximum of 40 percent of any incoming order. As of last week, Nasdaq had garnered a market share of roughly 0.5 percent, a figure Nasdaq chief executive Bob Greifeld said he was proud of.
"PSX is off to a fantastic start," Greifeld recently told analysts. "It's the most successful launch of an equities exchange ever."
Still, some question whether Nasdaq is meeting its goals. The exchange operator is touting PSX as a way to get large trades done on the public markets, where the average trade size is about 300 shares. The average size of a trade on PSX is only 30 percent greater, according to Nasdaq.
Richard Repetto, an analyst at Sandler O'Neill & Partners, asked Greifeld if he was disappointed with the size of the PSX trades. "It is in the range we expected," Greifeld said, "but we want it to go dramatically higher. People have to have confidence in the model." To make the dream a reality, Nasdaq is working closely with the buyside to make sure they have "true" direct access to the market," Greifeld added.
Executives at Nasdaq may be pleased with the performance of their new exchange, but they can't be happy with events over at Nasdaq OMX BX. The "inverted" market's share of trading hit about 5 percent in early April, but has fallen ever since. It now stands at about 2 percent.
BX is a direct competitor with Direct Edge's EDGA exchange and will now face off against BYX, the second stock exchange run by BATS Global Markets. All three exchanges operate a similar pricing structure that runs counter to the norm. Rather than pay suppliers of liquidity and charge takers--the maker-taker model--they do the reverse: They pay takers between 1 and 3 cents per 100 shares and charge makers from zero to 3 cents.
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