BATS Exchange, which has given the bigger market centers a run for their money, has opened up a new front in the pricing battle: stocks priced under $5. BATS yesterday announced it would give a rebate to liquidity takers in low-priced stocks.
Starting in April, BATS will offer two different pricing models for New York Stock Exchange- and Nasdaq-listed names, keyed to the price of the stock. The regular BATS pricing will apply to securities that are $5 or more (as well as to all stocks listed on other exchanges). However, for stocks under $5 listed on the two big markets, BATS will pay takers of liquidity a penny per 100 shares. It will not give those adding liquidity a rebate. This inverted pricing will cost BATS 1 cent per round lot.
“The rationale for doing what we’re doing below $5 was the recognition that there is no other exchange today, [in the wake of] the New York Stock Exchange changing its pricing over the last several months, that’s providing a pricing model with low access fees,” said Joe Ratterman, president and CEO of BATS Exchange. “That kind of pricing model has historically done well for lower-priced stocks.”
NYSE charges liquidity takers 18 cents per 100 shares and credits providers 10 cents. Before March, the Big Board’s pricing was an 8-cent take fee for liquidity takers and no rebate for providers. BATS’s take fee is 25 cents. The take fee at most of the other major market centers ranges from 26 cents to 30 cents.
Lower-priced stocks, Ratterman said, should have lower take fees. And more stocks now have lower prices than they did a year ago. Citigroup and AIG, for instance, are both high-volume stocks trading well under $5. Hundreds of other stocks have seen their price drop to several dollars per share. “There’s a good possibility that the shift to lower-priced stocks is a new trend,” Ratterman said. “So the aggressive pricing model we have that targets that band of securities could accelerate our continuing growth trend.”
BATS, however, isn’t the only venue with low pricing or a planned rebate for liquidity takers. Other market center operators have separate books that enable them to target different customers with different pricing models. And that pricing is not limited to low-priced stocks. Direct Edge ECN has two markets, including one, called EDGA, with a free-free model. It doesn’t charge participants to take liquidity and gives no rebate to those posting limit orders.
In addition, Nasdaq OMX Group last week announced that its still-tiny Boston market, which already has inverted pricing, would slide down the fee scale to get the attention of liquidity takers. Starting in April, Nasdaq OMX BX will pay liquidity takers a 6-cent rebate and give posters no rebate. BX’s pricing applies to Tapes A and C, which include, respectively, NYSE- and Nasdaq-listed stocks, while EDGA’s applies to all stocks.
Ratterman notes that BX has less than 0.5 percent of the consolidated volume and therefore hasn’t gained enough market share to matter. “They don’t have enough critical mass for that system to work yet,” he said. “People may try it, but they will want to go to a market center higher up in the routing queue that already has a lot of firms connected to it.”
As to Direct Edge, Ratterman acknowledged that EDGA “has a spot in this space.” But he thinks his exchange’s pricing is more attractive since it’s inverted and gives participants a credit for taking liquidity.
BATS’s matched market share in February was 11.4 percent, while Direct Edge’s was 8.3 percent, according to the market centers. Direct Edge’s volume includes its two markets as well as the ISE Stock Exchange, which it owns. Nasdaq, NYSE Arca and NYSE are the three biggest exchanges, in that order.
All of BATS’s main competitors operate multiple markets. Ratterman notes that his exchange’s use of stock-price breakpoints is an alternative to the two-book model its competitors are using.
Ratterman said BATS has thought about getting a second exchange license but doesn’t want to go that route. “We’ve considered applying for a second exchange medallion but we’re consciously trying to avoid that,” he said. “Adding book after book just to put out different pricing models is a burden on the industry. We don’t want to add yet another one for everyone to connect to and put into a routing table.”
Michael Vinciquerra, an equity research analyst at BMO Capital Markets, notes that the multiple-book tactic has been used effectively by Direct Edge, although Nasdaq OMX “quickly identified it as an opportunity to leverage current technology with little incremental cost while appealing to different customer groups.” Hence, Nasdaq OMX re-launched the Boston market in January. Vinciquerra points out that multiple books also serve different purposes. NYSE Euronext, for instance, gained a second book when it acquired Arca (and a third when it brought the American Stock Exchange into the fold). But the NYSE’s position with Arca was more defensive, according to the BMO analyst, “because management realized that the lower-technology floor operation was certain to lose share over time” to NYSE’s faster rivals.
In the last year, BATS and Direct Edge have gained market share at the expense of the bigger markets. Both of these venues, Vinciquerra said, have successfully used “aggressive and simple pricing” to appeal to trading firms. In his view, the fact that these firms are owned mainly by broker-dealers has helped them compete. “They have low-cost structures, fast and reliable technology, owners who are big liquidity providers, and no public shareholders concerned about their quarterly profit,” Vinciquerra said.
In addition to its new pricing for low-priced stocks, BATS in April will adjust its fee schedule for stocks $5 and over. The exchange is dropping its rebate for NYSE- and Nasdaq-listed equities by 1 cent, to 23 cents per 100 shares, and lowering its routing fee to 26 cents. It is also offering participants discounted executions on the NYSE if they check BATS’s book for liquidity first.
This pricing gambit comes on the heels of Nasdaq OMX’s new pricing, announced last week. Starting in April, Nasdaq OMX will lower Nasdaq’s rebate and take fee for its highest-volume customers, and drop its routing fee to 26 cents, along with BX’s new pricing. Those pricing changes followed NYSE Euronext’s earlier changes to the fee schedules of both the New York and Arca, which went into effect in March. Direct Edge this past Wednesday also lowered its routing fees, starting April 1.
