In an unprecedented appeal to liquidity providers, NYSE Euronext this month changed its transaction pricing for the New York Stock Exchange and NYSE Arca to prevent further attrition of the exchange group’s market share in Big Board-listed securities. Most significantly, it will no longer charge liquidity providers a fee to execute on the NYSE.
The exchange group’s two U.S. exchanges-NYSE and NYSE Arca-now account for about 60 percent of NYSE-listed trading, down from about 68 percent a year ago, according to the exchange. The exchange’s pricing changes are part of its efforts to “stop the bleeding and get it going in another direction,” said Duncan Niederauer, president and co-COO of NYSE Euronext, at a Lehman Brothers financial-services conference last month.
He speculated that NYSE Group’s market share in listed stocks could climb back up to 65 percent or more. NYSE Group, a subsidiary of NYSE Euronext, operates the two U.S. markets.
These pricing changes “reflect the reality that among major market centers, order flow is up for grabs,” said Bill O’Brien, president of Direct Edge ECN, owned by Knight Capital Group and other firms. “No matter the level of their brand or their history, every market center needs to compete on a level playing field-and that includes on price.”
Tom Doyle, a senior institutional trader at Connecticut broker-dealer Nutmeg Securities, agrees. “The business is going to flow to the lowest-cost [exchange] providers, assuming the quality of markets is the same,” he said. “This bodes well for people who provide liquidity by posting orders.”
Larry Leibowitz, chief operating officer for U.S. markets at NYSE Euronext, noted that the NYSE’s days as a monopoly were finally over. “We recognize that people don’t have to trade here anymore,” he said at the Lehman conference.
The “NYSE classic,” as NYSE Euronext sometimes refers to the Big Board, switched from its traditional single fee for liquidity providers and liquidity takers to differentiated pricing for liquidity providers and liquidity takers. The pricing changes, scheduled to go into effect this month, increased the rate to remove liquidity from the exchange and eliminated the fee to provide liquidity. The NYSE did not, however, institute a provider rebate, as is now customary in other electronic markets. The NYSE’s new fee for liquidity takers is 8 cents per 100 shares, compared to the previous fee of 2.75 cents per 100 shares for liquidity providers and takers.
NYSE Arca’s pricing for listed stocks also changed. Its rebate for liquidity providers is now 25 cents for 100 shares, up from 20 cents. Its liquidity taker fee remains at 30 cents.
NYSE’s shift is a nod to the ECN pricing model, which has drawn market share away from the NYSE. In August, Nasdaq’s matched NYSE-listed market share was 19.3 percent, compared to 12.5 percent in August 2006.
Upping the ante, BATS last month also launched an attack on NYSE-listed trading with an inverted pricing model that paid liquidity providers 34 cents and charged takers 24 cents for 100 shares. In the first three weeks of September, BATS’s matched share of NYSE-listed stocks rose to 7 percent, from 2.7 percent in August. For the rest of the year, BATS will rebate 24 cents to liquidity adders and charge takers 24 cents.
NYSE Group’s two-pronged approach to pricing changes for listed stocks is part of the company’s effort to keep flow within its walls by segmenting its markets. “In terms of posted liquidity, they’re trying to attract active traders, algo shops and rebate-sensitive traders to the Arca model,” said Joe Mecane, head of broker services at UBS. “For those taking liquidity, they’re trying to incent them to sweep New York first, since it’s still a cheaper venue to take liquidity from. They’re not trying to incent the high-volume players to post liquidity on the floor.”
Adam Sussman, a senior analyst at research firm TABB Group, sees the NYSE’s pricing as an effort to create a “sustainable business model” for itself and specialist firms. “There’s no opportunity to become a profitable liquidity provider on Hybrid-they’re still relying on specialists for that,” he said. “But they’re saying, ‘if you want to provide liquidity, we won’t charge you anything.’ “
A number of large brokers who declined to comment publicly said their costs for listed trading would rise as a result of this new pricing. Algorithmic traders more often than not are liquidity takers, rather than providers, they said, so their costs for trading on the NYSE would increase.
“Flow is clearly leaving the NYSE, and more of it is going to Nasdaq than Arca,” said Jamie Selway, founder and managing director at institutional broker White Cap Trading. In his view, attracting that liquidity to Arca through liquidity-provider incentives makes sense. “That won’t please traditional brokers, but the reason people rebate and pursue black-box guys is that they’re the liquidity providers that [market centers] want,” Selway added. “If you have them, the thinking goes, the traditional brokers will follow because they have to go to the best price.”