NYSE Amex will soon be trading all Nasdaq-listed stocks. The exchange plans to add Nasdaq stocks to the names it trades early in the first quarter of next year. The QQQQs will be included in that list.
As part of this expansion, NYSE Euronext, which operates the Amex market, will have a single designated market maker for every Nasdaq stock. One or more additional market makers, which the exchange operator calls supplemental liquidity providers, will also be assigned to most securities.
"The overall model will be largely consistent with the current Amex market model, which is based on the NYSE model, with some differentiation to reflect the fact that we’re not the listing market," said Joe Mecane, executive vice president for U.S. markets at NYSE Euronext. He added that there will, at least initially, be no open and closing auctions for Nasdaq securities on the Amex market. Amex will trade the securities only intraday.
Trading Nasdaq-listed, or so-called Tape C, stocks on Amex will give NYSE Euronext a second execution venue for those names, since NYSE Arca already trades Tape C securities. "Our [Amex] market structure is unique and differentiated compared to more traditional time-priority markets," Mecane said. "There’s an opportunity for us to leverage our platform to deliver value to the market and acquire market share in the process." NYSE Euronext owns the New York Stock Exchange, NYSE Arca and NYSE Amex. The exchange operator acquired Amex last year for $260 million.
In Mecane’s view, there are several benefits to having a second market trading Nasdaq names. In addition to attracting new participants, the two exchanges’ market models are different, with each model appealing to different types of firms. Finally, "there’s a benefit to having another [protected] quote out there with a slightly different pricing structure," Mecane said. He added that Tape C pricing on Amex "will probably not be dissimilar from our current NYSE or Amex pricing structures," but declined to comment further.
Mecane expects NYSE Euronext to gain some market share in Tape C names. "It’s hard to gauge how much this could impact the marketplace," he said. "I would hope that six months into [our rollout] we would have a couple percentage points of market share [in Tape C names], but we’ll have to see."
Last month was the first time in several years that Arca wasn’t the second-largest market for Tape C names, behind Nasdaq. Instead, Direct Edge, with 13.2 percent of Tape C volume, pushed past Arca’s 12.5 percent. Nasdaq’s market share in its listed securities was 30 percent last month, while BATS Exchange had 11.3 percent. These figures come from Barclays Capital data.
"It’s a good move for the NYSE and it’ll be good for investors to have an additional market destination providing liquidity in Tape C stocks," said Jamil Nazarali, managing director of Knight Equity Markets. "We’ll be interested as more details become available. In particular, pricing relative to other venues will be a critical issue for investors."
All Nasdaq stocks will have a designated market maker on the Amex platform. Mecane expects the exchange to have "probably five or six" DMMs for Nasdaq-listed names. The DMMs could include DMMs currently trading on the Amex and NYSE platforms, supplemental liquidity providers currently making markets on the Big Board, as well as other firms. "We’re talking to a wide variety of firms, including current DMMs and some potential new DMMs," he said.
Amex could also have multiple SLPs per security, according to Mecane. "It depends on how strong the interest is," he said.
Knight, which is currently an SLP on the NYSE in several hundred stocks, is interested in the new Amex market-maker program. "We’ll definitely evaluate it," Nazarali said. "We haven’t seen what the program looks like yet, but we’d consider it."
Instituting a DMM program for Nasdaq stocks represents a new competitive wrinkle in the marketplace, but not one that automatically guarantees success. Nasdaq has hundreds of market makers on its platform with a long history quoting Nasdaq names at that market. Nasdaq also operates Nasdaq OMX BX, its Boston market, which offers radically different pricing than its main Nasdaq market and has recently been gaining volume, particularly in liquid, low-priced stocks.
Sang Lee, founder of research firm Aite Group, noted that "having committed market makers coming in gives Amex a foundation for liquidity. That’s not a bad thing." Still, he pointed out that the market for Tape C names is extremely competitive. Lee said he doesn’t think Amex will add significantly to NYSE Euronext’s Tape C market share.
NYSE Euronext hopes the Amex market model will attract new volume in Tape C names. The Big Board and Amex are what used to be called specialist-based exchanges, while Arca, Nasdaq and other venues are traditional price-time-priority markets. Last fall, as part of NYSE’s continuing modernization, Big Board specialists transitioned into designated market makers. In that process, they lost some of the benefits specialists formerly had and saw their obligations decrease.
Now, the main difference between these two types of market models is that the DMM system has a single firm obligated to make tight markets a certain percentage of the time, while other platforms have numerous registered market makers competing in a security with no benefits accorded to any of them in particular. Another difference is that the DMM system on the NYSE Euronext markets is a parity-based system, which alters the execution priority of market participants quoting on those markets.
On NYSE and Amex, the DMM, any floor broker and the first order in the exchange’s order book all have parity if they’re quoting at the same price. That means they each have equal standing in terms of execution priority at a particular price level. In comparison, orders on pure price-time-priority markets that are at the same price are executed in the order in which they were received.
Nasdaq OMX Group clearly prefers a flat price-time-priority market to the DMM system. Last fall, Nasdaq wrote the following on a page about market models on its web site: "The New York Stock Exchange has introduced a new market structure that allows designated market makers and floor brokers to cut in front of public orders sent to the NYSE via DOT. This is a stark contrast to the Nasdaq price-time model, where execution logic is fair and transparent." The comment about DOT orders, although they’re no longer called that, refers to orders sent into the NYSE’s order book.
NYSE Euronext believes a DMM-based system offers investors advantages, including more liquidity. Tape C DMMs on Amex are likely to have similar quoting obligations to the requirements imposed on DMMs on Amex and NYSE. "DMMs will have meaningful obligations with respect to the market, in terms of needing to quote [at the national best bid and offer] a certain amount of time," Mecane said. Currently, the Amex DMMs must be at the NBBO 5 percent of the time for liquid stocks and 10 percent of the time for less-liquid stocks. (The levels on NYSE were raised higher last week.)
Mecane said the exchange operator chose not to roll out Nasdaq-listed stocks on the Big Board for logistical reasons and because it wanted to maintain "some differentiation since we are not the listing market for those securities." Since 2002, Amex has had "unlisted trading privileges," for Nasdaq names, which allows it to trade Tape C securities. However, it currently does not trade any Nasdaq names. The trading executive said the exchange has been conducting technology development work and updating rules associated with the UTP program.
NYSE Euronext is now in discussions with the Securities and Exchange Commission about some of the rule details, Mecane said. The SEC would have to approve a new rule set for trading Nasdaq names on Amex.
The initial rollout of Nasdaq stocks on Amex is expected to occur early next year. All Nasdaq stocks will be included in that rollout, including the popular QQQQ. Other ETFs may be available for trading at a later date.
Once trading is allowed, floor brokers will be able to trade Nasdaq-listed stocks on the Big Board floor. Technically, however, they will be trading them on the floor of the Amex. Amex DMMs are located in the Big Board’s Garage. DMMs for Nasdaq-listed securities are expected to be in the Garage as well as elsewhere on the floor, according to Mecane. He added that floor-based trading is likely to be lower than it is on the company’s other platforms since Amex will not have an open or close for Tape C names.