Nasdaq OMX Group, which acquired the Boston Stock Exchange in August, will re-launch the Boston market center as Nasdaq OMX BX on January 12. That market will be the exchange operator’s second protected equities quote in the U.S.
BX also gives its parent company a dual-market pricing capability in a fee-conscious equities world. “It’s another protected quote, and that creates opportunities on another platform,” said Brian Hyndman, senior vice president for transaction services at Nasdaq OMX. (Nasdaq OMX also owns Nasdaq OMX Phlx, the old Philadelphia Stock Exchange, but that market trades only options.)
BX’s pricing is designed to appeal to liquidity takers, while Nasdaq caters more to liquidity providers. The BX pricing offers a rebate of 20 cents per 100 shares for liquidity providers, and charges liquidity takers a fee of 22 cents per 100 shares. The pricing is the same for all NMS securities and does not include volume-based incentive tiers.
“It’s a different pricing structure that caters to a different constituent group,” Hyndman said. “We wanted to attract those who want to take liquidity from destinations with a lower take rate, but we still wanted to have a material rebate to get the posters in there.”
BX’s low take rate targets bulge-bracket firms, which tend to be net takers of liquidity, according to Hyndman. These firms usually take more liquidity than they provide. High take costs are therefore less attractive to those players.
Randy Frederick, director of trading and derivatives at Charles Schwab, noted that BX’s lower take fee could also “provide a marketplace where retail brokers are more interested in going if multiple markets are at the same price.” Retail brokers and other takers must absorb the take fees charged by venues. Schwab’s routing decisions are made by UBS with “significant input” from Schwab trading executives.
According to Hyndman, about 45 firms have submitted paperwork to trade on BX so far, and 75 to 80 firms are likely to be participants when the exchange launches in January. The current firms range from retail brokers and bulges to black-box traders and high-frequency algo shops. Hyndman declined to comment on how much market share BX might gain next year. (The Boston Equities Exchange was shuttered in September 2007 after failing to build more than negligible market share in a Regulation NMS environment.)
The dual-pricing capacity BX offers, in conjunction with the Nasdaq market, echoes the market model of Direct Edge’s two ECN markets, and could offer new competition to BATS, which has gained market share in the last year and recently became an exchange. Between Nasdaq OMX’s two markets, the exchange company can offer large customers a higher rebate on Nasdaq (28 cents) than BATS offers (24 cents), and a lower take fee on BX (22 cents) than BATS has (25 cents).
BX will run on the same INET technology that undergirds the Nasdaq Market Center. Firms that co-locate their servers in Nasdaq’s northern New Jersey data center can be co-located for BX as well.
Randy Williams, marketing director at BATS, said the exchange is happy with its transaction pricing. He pointed out that BATS, which hasn’t changed its pricing this year, unlike other large market centers, increased its matched market share to 11.4 percent in October, compared to 6.3 percent at the end of 2007.
BX’s maker-taker pricing sits a few notches down the pricing scale from the Nasdaq market. Nasdaq’s best pricing for its most active customers is a 28-cent rebate for every 100 shares added to the book and a 29-cent take fee. BX’s pricing also gives Nasdaq OMX a spread of 2 cents per 100 shares, double the spread Nasdaq gets from its most active participants for transactions in New York Stock Exchange-listed and Nasdaq-listed securities. The exchange operator will not give participants market data revenue rebates for trading on BX.
Nasdaq is the largest U.S. exchange operator, with 29.6 percent of NMS volume in the third quarter of this year. In the third quarter of 2007, its market share was 29.5. Nasdaq lost market share in its own listed names year over year, but gained share in NYSE-listed securities. Consolidated volume was up about 32 percent over that period.
The Boston market is a separate self-regulatory organization from Nasdaq, but it will be managed as one of the venue siblings run by the Nasdaq transaction services unit, which oversees the parent company’s U.S. equities and options markets and the European multilateral trading facility. Chris Concannon, executive vice president at Nasdaq OMX, heads that unit. Hyndman’s responsibility is to grow volume and market share on both BX and Nasdaq’s current U.S. equity platform.
