Two weeks after NYSE Euronext altered NYSE Arca’s fee schedule in an assault on Nasdaq’s market share, Nasdaq OMX hit back with a new slate of aggressive pricing. In addition to jettisoning its complex pricing based on listing market in favor of a uniform fee schedule for all NMS securities, Nasdaq positioned itself as the highest rebate provider for the biggest firms providing liquidity in Nasdaq-listed names.
When the new pricing goes into effect on May 1, Nasdaq’s highest rebate for those big liquidity providers will be 28 cents per 100 shares for all securities. It has been 27 cents for New York Stock Exchange-based securities (Tape A), and 25 cents for securities listed on Nasdaq (Tape C) or other exchanges (Tape B). Nasdaq’s best take fee rose in tandem, to 29 cents, making it costlier to remove liquidity from its book. The take fee has been 28 cents for Tape A names and 26 cents for other securities.
Brian Hyndman, senior vice president for transaction services at Nasdaq, noted that the pricing schedule change was a response to a recent move by “a competitor” and the desire to have a more unified and simpler pricing structure. “We felt we needed to make a modification to gain more market share,” he said. Hyndman added that Nasdaq’s volume and market share were up dramatically in the first quarter of this year, compared with the first quarter of 2007.
However, Arca’s average matched market share in Nasdaq-listed names increased 1.2 percentage points this month through April 16, to 17.5 percent, compared to its March share of 16.3 percent, according to the Lehman Brothers equity research group. Arca’s aggressive pricing change, which kicked in on April 1, included inverted maker-taker pricing for high-volume customers in Nasdaq-listed names. For those firms, Arca pays a rebate of 26 cents for 100 shares of liquidity added to its market and charges liquidity takers a 24.5-cent fee.
Matt Simon, an analyst at research firm TABB Group, said the latest salvo of transaction fee changes by NYSE Arca and Nasdaq reflects the “pricing war going on.” The two exchanges, he added, “are trying to undercut one another because there are a limited number of ways to differentiate themselves other than on price.”
That pricing war is aimed at attracting the big guns that provide liquidity on the exchanges. “The pricing move [by Nasdaq] seems to be directed primarily at liquidity providers,” noted a Lehman equities research report issued on Tuesday.
In Tape C, where the competition is toughest, Nasdaq’s new top rebate leapfrogs Arca’s 26-cent rebate for its highest-tier players. It also bests BATS Trading’s 24-cent rebate for Tape C, although BATS’s pricing applies to all comers, unlike its bigger rivals’ pricing. Both Arca and Nasdaq have 20-cent rebates for lower-volume firms.
Nasdaq, however, doesn’t see its new pricing as appealing primarily to rebate-seeking liquidity suppliers. It expects to impact the behavior of liquidity takers as well. “We think the liquidity providers will get more aggressive and create more of an opportunity for the liquidity takers,” Hyndman said.
Colin Clark, vice president in charge of strategic market analysis at NYSE Euronext, declined to comment on Nasdaq’s pricing change. But, he said, Arca’s “inverted rate for the more-active customers is the best pricing combination in Tape C” for those firms that both take and provide a lot of liquidity. He added that Arca also offers smaller firms a “compelling pricing package that’s attractive to liquidity providers and net takers alike.”
Clark noted that exchanges’ focus on rebate providers is natural in the current market. “Generally speaking, firms have more discretion over posting liquidity than taking liquidity,” he said. “There may be more opportunities to select the exchange that offers the highest rebate.” However, Clark added, “there’s a balance you want to strike in appeasing the overall customer base and not just one segment of your customers.”
After nearly a year and a half of complicated pricing for Tapes A, B and C, Nasdaq’s pricing will return to a uniform fee schedule for all NMS securities. That means stocks listed on the NYSE, Amex or Nasdaq won’t have their own separate pricing schedule.
But that uniform schedule does have three volume-based tiers, geared toward more-active and less-active traders, for both liquidity providers and liquidity takers. When the changes take effect in May, smaller firms won’t see any difference in their pricing, but mid-tier firms will see both their rebates and take fees rise.
Another sign that Nasdaq is targeting the most active players is the spread between what firms earn or pay for liquidity based on their average daily volume. Nasdaq’s pricing “widens the gap between the small and large players by giving a greater rebate to heavier players and trying to encourage activity and liquidity flow,” said TABB’s Simon.
That gap will increase on the rebate side and decrease drastically for takers. For Nasdaq-listed securities, the difference between Nasdaq’s best and base rebates will be 8 cents, compared to the current difference of 5 cents. On the take side, the difference will be just a penny, down from the current 4-cent spread. That shift seems to suggest a greater ability to use pricing as a carrot to change the behavior of liquidity providers, compared to that of liquidity takers.
Nasdaq’s new pricing schedule also alters the rebate for non-displayed orders. Instead of those orders generating a penny less than the rebate the order-sending firm would receive for displayed orders, Nasdaq cut the rebate to 15 cents or 10 cents per 100 shares, depending on the firm’s average daily volume.
“For people displaying liquidity on our book, they’re taking more risk and should be more rewarded with a higher rebate, vs. the person going non-displayed, who’s taking less risk,” Hyndman said. “We felt they should still get a rebate, but just not as high as what’s provided to people who display liquidity on our book.”
Although this change in pricing for non-displayed orders is a big rebate cut, Nasdaq doesn’t expect it to impact its volumes. “We offer a very aggressive rebate if those liquidity providers want to go displayed,” Hyndman said. In addition, NYSE Arca does not pay any rebate for non-displayed orders.
