NYSE Arca beat Nasdaq to the punch. On Wednesday, Arca announced a price improvement and routing service that gives users access to order flow in 29 pools of non-displayed liquidity. Both Arca and Nasdaq have been working on similar initiatives for the past several months, according to executives at both exchanges.
Nasdaq’s offering, currently under development, is scheduled to launch in mid-April. That initiative will pool electronic liquidity from a “handful” of non-displayed execution venues, said Brian Hyndman, senior vice president for transaction services at Nasdaq OMX Group.
For Arca, this is a competitive move that will benefit the exchange as well as customers. “We don’t want to send out outbound flow,” said Christine Sandler, senior vice president for North American sales at NYSE Euronext, the parent company of NYSE Arca. “We wanted an alternative for clients so we would not have to send [orders] outbound. This is about improving execution quality and reducing costs for customers.”
Arca’s initiative went live on Wednesday. Now, after a marketable order checks Arca’s book for liquidity, it passes through what Sandler calls a “cloud” of electronic indications from as many as 29 dark pools (not all are online yet). The order executes against indications pooled in the cloud before being routed to protected quotes on other markets. Customers that execute against the cloud are guaranteed NBBO-or-better executions. Those trades will print to either Arca or a trade reporting facility, based on what the dark pool prefers.
According to Sandler, the benefit for customers is additional liquidity, better prices and a method of getting around the fragmentation of non-displayed flow that could cause firms to miss liquidity in the market. She noted that the electronic cloud could provide customers with additional liquidity beyond what is displayed or available in the markets, or additional liquidity priced better than the NBBO.
“We’re bridging the public marketplaces and dark pools, trying to solve the fragmentation issue,” Sandler said. “Bringing this liquidity together with our displayed book will attract more order flow [to Arca] and could also attract more posted order flow.” She added that electronic indications within the cloud provide faster executions than when orders are routed to other destinations.
Nasdaq’s plan is also an effort to get first dibs on customers’ orders by enticing them with dark liquidity. The ability to aggregate that liquidity for customers and execute against it could increase Nasdaq’s executed volume and market share.
“Liquidity in dark pools has increased over the past 12-to-18 months,” Nasdaq’s Hyndman said. “We hope to get more stock done at a specific price before going to the next price level. This will give customers quicker, better executions.” He adds that this could also draw more liquidity to Nasdaq.
Nasdaq’s initiative will work the same way Arca’s does. After orders pass through Nasdaq’s book, they will look for electronic indications before routing to the protected quotes at other market centers. Firms that submit dark indications can choose whether to print to the exchange or on a TRF. According to Nasdaq, its partners haven’t indicated that they want to print to a TRF.
Neither Arca nor Nasdaq will disclose the names of the dark pools sending them indications. However, both will automatically expose outbound orders to their incoming electronic indications before routing to other markets. (Customers can opt out of this through the use of certain order types.) The routers at both exchanges will base their execution decisions on the fill rates they receive from the electronic indications providers and on speed.
The similarities in these two offerings extend to the pricing front. Orders sent to Arca or Nasdaq that execute against non-displayed liquidity from external execution venues will pay the exchange’s routing fee. Arca’s route-out fee is 30 to 35 cents per 100 shares, while Nasdaq’s varies from 26 to 30 cents for 100 shares. Later this year, Sandler said, Arca expects to lower the fee for executions against the electronic cloud to its liquidity-taker fee, which currently is either 25 cents or 30 cents, depending on the stocks executed.