Arca Woos Biggest Traders with Aggressive Transaction Pricing

NYSE Arca on Monday rolled out a slate of aggressive pricing changes for trades in New York Stock Exchange- and Nasdaq-listed securities. The changes, which went into effect yesterday, appear targeted to snatch volume from Nasdaq and BATS Trading. The changes are also likely to benefit the largest trading houses. Smaller shops, in contrast, got a price increase in their Nasdaq-listed trading.

“We’re constantly getting feedback from customers, and we’re looking to improve our competitive position,” said Colin Clark, vice president in charge of strategic market analysis at NYSE Euronext.

The new pricing comes three months after Arca’s previous pricing changes, which may have contributed to an increase in its market share in Nasdaq-listed trading. Arca’s February matched market share for Nasdaq names was 16 percent, up from 14.8 percent in December, before its previous pricing change took effect. But that’s still down from Arca’s February 2007 matched market share of 18.4 percent in Nasdaq-listed securities.

Arca’s pricing structure now rivals the complexity of Nasdaq’s. On the New York side, Arca added a second volume-based rebate tier. That rebate is 28 cents for firms that meet the volume threshold, compared to the continuing 25-cent rebate for everyone else. And on the Nasdaq side, Arca now has three volume-based rebate tiers instead of the previous two: 26, 25 and 20 cents, versus 24 and 20 cents. The exchange also has volume-based caps on the highest rebate tiers for both NYSE-listed and Nasdaq-listed names, respectively known as Tape A and Tape C. After that, the rebate falls back to the next-highest level.

As part of its pricing for Nasdaq-listed securities, Arca’s new highest tier offers inverted pricing. BATS first applied inverted pricing, in which the liquidity-provider rebate is higher than the take fee, with enormous success in January 2007. For Tape C securities, Arca now offers its biggest customers a 26-cent rebate per 100 shares and a take fee of 24.5 cents. For those firms, that represents a 2-cent jump in the rebate and a half-cent reduction in the take fee over Arca’s previous best pricing. Arca’s pricing for lower tiers for Nasdaq names isn’t inverted.

Arca’s new Tape C pricing schedule, and particularly the inverted pricing, are geared toward getting larger players to route through Arca, said Matt Samelson, an analyst at Aite Group. He added that both NYSE Euronext and Nasdaq OMX have deep pockets that can sustain aggressive pricing moves, compared to some of their competitors, such as BATS.

“Some players can afford to go deeper and last longer,” Samelson said about making pricing reductions. “If they cut pricing, even if they’re operating at a loss, they can basically sweat out their competitors.” In his view, Arca’s inverted pricing could draw additional volume its way.

Arca’s 24.5-cent take fee undercuts BATS’s 25 cents and Nasdaq’s best take fee of 26 cents. For lower-volume customers, Arca’s 26-cent take fee, Clark said, is lower than Nasdaq’s 30-cent take fee for firms that don’t meet Nasdaq’s top-tier volume levels. However, Arca’s new pricing still represents an increase in the take fee for smaller firms, to 26 cents from 25 cents. Those smaller trading houses are liable to see their monthly bills increase, since they, unlike larger players, did not also get an increase in their rebate.

Joe Ratterman, CEO of BATS, yesterday sent customers an email response to Arca’s pricing announcement, minimizing the changes. “If you happen to be one of the few Arca customers that hit the minimum 60 million shares per day volume tier [in Tape C], then you may see a small savings going forward,” Ratterman wrote. “The reduction in access fees for top-tier customers amounts to a minor savings of 0.00005 per share traded, or a half mil.”

Still, that half-mil savings remains a benefit for big broker-dealers. And the inverted pricing could put Arca in the sweet spot for some algorithms.

NYSE Arca’s Tape C rebate is also aggressive for large brokers. The new top rebate is 26 cents, while the rebate the next level down is 25 cents, up a penny from that volume tier’s previous fee. BATS’s rebate is 24 cents and Nasdaq’s best rebate is 25 cents. “Generally speaking, there tends to be more discretion on where firms post orders than where they take liquidity,” Clark said, explaining the pricing decision. “Takers follow the best prices and liquidity.”

On the Tape A side, Arca added a new 28-cent rebate tier for its bigger-volume customers. “It’s a significantly more attractive rebate for more active customers than other market centers,” Clark said. Nasdaq’s best rebate is 27 cents and BATS is at 24 cents. Arca’s base rebate for firms that don’t qualify for the new tier remains 25 cents.

However, removing Tape A liquidity on Arca is still pricey. That fee is 30 cents. BATS’s take fee undercuts Arca’s by a full nickel, and Nasdaq’s best take fee is 2 cents below Arca’s.