Nasdaq, in the wake of its market share losing a couple percentage points in as many weeks, announced new pricing starting in April. It will also pay liquidity takers using its Boston market as part of a two-pronged effort to draw more order flow its way.
“Our market share dipped slightly, but this is a competitive space and market share will ebb and flow,” said Brian Hyndman, senior vice president of Nasdaq transaction services.
Nasdaq dropped its take fee for Nasdaq- and New York Stock Exchange-listed stocks for its most active customers in an apparent effort to be more competitive on price with BATS Exchange and Direct Edge. Starting next month, the exchange’s fee will be 26 cents per 100 shares, down from 29 cents, which was the highest among the major markets. The rebate for liquidity adders will also drop 3 cents, to 25 cents per round lot. In addition, the exchange altered its volume tiers to bring in more liquidity adders.
“Being last in the router queue [of algorithms] wasn’t best in the current environment,” Hyndman said. “Our 28/29 [rebate/fee] pricing worked for many years, but in the current dynamic we needed to find the sweet spot again, so we moved it down. That, plus our reduced routing rate, should get more flow across our book.” Nasdaq’s routing fee will be 26 cents in April, down from 29 cents. That will make it the industry’s lowest for non-NYSE venues.
Nasdaq’s pricing shift could mark the demise, at least temporarily, of the high rebate and high take fee model. “In the past, we felt strongly that the rebate would drive liquidity to our venue, and that worked for many years,” Hyndman said. “Now, especially given the low price of many stocks, the take rate matters a little more.”
Over the last couple of years, Nasdaq and NYSE Arca increased their take fees to cover higher rebates. While Arca has also had a high rebate and high take fee model, in March it inverted its pricing for Tapes A and C (NYSE- and Nasdaq-listed stocks, respectively), giving out a 1-cent higher rebate than the take fee it charges those removing liquidity from its book. Arca’s take fee is 28 cents for its highest-tier customers.
Nasdaq’s matched Tape C market share dropped 3.1 percentage points over the last two weeks, with last week’s share at 36.1 percent, according to Barclays Capital research. Nasdaq’s Tape A share dropped 2.1 percentage points over the same period. Its average last week was 16.6 percent.
BATS is now trading just under 10 percent of Tape A names and over 12 percent in Tape C, according to Barclays. Direct Edge is closing in on 9 percent in Tape A and is just over 9 percent in Tape C market share.
Sang Lee, managing partner of research firm Aite Group, points out that following market share changes on a weekly or monthly basis is shortsighted. However, he said, both Nasdaq and NYSE have been losing market share over a longer period, mostly to BATS and Direct Edge. “Both of those [latter] venues have seen a rapid increase in their market share over the last 12 months, driven by speed, technology and innovative means of attracting liquidity,” he said.
Bryan Harkins, head of sales and strategy at Direct Edge ECN, said Direct Edge increased its matched market share in the first two weeks of March at Nasdaq’s expense. “We’ve been winning business from Nasdaq, and we’ve been able to win over some heavy adders of liquidity on Nasdaq,” he said. The ECN operator has two markets. EDGA is free for liquidity takers and adders, while EDGX has maker-taker pricing that’s inverted across all three tapes for its highest-volume participants.
“The Street has adopted the EDGA platform because it’s free to remove liquidity, and we came into March with 9-10 percent matched market share,” Harkins said. “As a result of the liquidity, obstacles to doing business with Direct Edge were removed for many participants. They routed more flow to us.” Direct Edge, he said, has also gained market share in Tape B names (those listed on Arca and NYSE Amex) because of its 35-cent rebate. That’s the industry’s highest credit for liquidity providers.
Nasdaq’s Hyndman acknowledged that Direct Edge has gained market share in recent months but said the “real growth has come from dark pools in the last 30 days.” In NYSE-listed names, he said, dark pools and internalization have accounted for close to 25 percent of consolidated market share this month, compared to 18 percent toward the end of last year and about 12 percent three years ago. Dark pools and internalization accounted for about 25 percent of Nasdaq-listed names in March, up from 21 percent at the end of 2008, he said.
Regarding Tape B, Hyndman said both dark pool growth and inverted pricing at several markets have “slightly impacted” Nasdaq’s volume. Both BATS and Direct Edge have inverted pricing, while Nasdaq ended its inverted pricing this month. Nasdaq remains the largest market for Tape B trading, with a market share of 30 percent. Nasdaq’s March month-do-date share in Tape B names is 28 percent, according to the exchange.
Nasdaq is also changing the pricing on Nasdaq OMX BX, its Boston exchange. In an unusual move, BX, starting in April, will pay liquidity takers 6 cents per 100 shares. Liquidity adders will not get a rebate. BX’s current pricing is a 20-cent rebate and 14-cent take fee, so the spread remains inverted, with BX losing 6 cents per execution. It is being pushed further down the pricing scale to attract liquidity takers, Hyndman said.
BX currently has a matched market share of about 0.5 percent, but that’s expected to grow, Hyndman said. Nasdaq re-launched the Boston market in January, after acquiring the Boston Stock Exchange last year.
Aite’s Lee notes that BX’s pricing is “intriguing” and mirrors Direct Edge’s use of a dual-platform model to attract different types of market participants. He is interested, he said, in seeing how much more volume BX gets, “and, more importantly, whether or not Nasdaq can maintain BX’s inverted pricing.”
BX does not route out to other markets. However, Nasdaq is keeping that market’s routing options open and could alter its routing policy. “It’s something we could consider if that’s important to making it a viable venue,” Hyndman said.
