Eric Noll, a Nasdaq OMX executive vice president responsible for transaction services in the U.S. and U.K, discussed his various businesses during Nasdaq’s Investor Day on May 10. What follows is an edited transcript. In this, the second part of a two-part series, edited by Peter Chapman, Noll discusses Nasdaq’s moves in options as well as trends in the options industry.
>>On the need for the new Bx exchange
Customer orders are highly price sensitive and [the retail brokers] aggressively seek rebates to [offset] their shrinking payment-for-order-flow pools. So they’re looking to replace with other functionality and other sources of income that what they were getting directly in terms of payment for order flow. So they are aggressive rebate seekers.
>>On the new BX as a solution for the decline in payment for order flow
[Nasdaq Bx] gives us a chance to be the first options exchange to offer a model that pays takers of liquidity as opposed to makers of liquidity. Payment for order flow has become increasingly opaque. It has become increasingly difficult for earners of payment for order flow to know what they’re getting paid and how they’re getting paid. [Nasdaq Bx] is a model that actually makes their rebate for taking liquidity transparent, competitive and certain. And we think that has real value to them. So every other market model that operates out there operates primarily for the benefit of the provider of liquidity. This is going to be the first model out there that operates to the benefit of the taker of liquidity.
>>On the expectations for Bx
We think we’re going to hit about a 3 percent market share by the end of 2013. We expect it will be accretive [to earnings] very quickly as we grow our business and we think that it gives us the chance to continue to expand our footprint in the equity options space.
>>On low-latency trading in options
There’s an increasing demand for low latency and low cost execution. That’s relatively new for the options market which is probably a generation behind the equities market in that respect. Plus there is an increasing demand for co-lo services and market data. The split right now of [our] Access Services division is about 80 percent equities and 20 percent options. So we do think that there is real space to grow the options side of our business.
>>On the shift in options flow away from the over-the-counter market
There’s a shift from the OTC markets to the regulated market. This is hard to quantify and a lot of this is anecdotal information, but as Dodd-Frank has rolled out, particularly with OTC individual equities product, we’re seeing more and more of that flow coming onto the exchanges. The largest growth that we have seen in that business is in what we’re calling our complex order flow. These are complex spreads, often tied to stock, and they’re coming from brokers who have traditionally done this business in the over-the-counter market. So they’re starting to address their Dodd-Frank concerns by getting this in the clearinghouse and getting it on a transparent market. But they’re also bringing more transparency and lower costs. So we expect that business to continue growing.
>>On the impact of this new business on Nasdaq’s trading floor
Our voice business and our floor business remain surprisingly robust. I would have expected over the long term that business to start to wither as electronic trading became more and more prevalent in options. But the floor remains quite active for us. And with the growth in complex order flow, it remains an important part of our business.
