Early Results of Nasdaq Fee Pilot Inconclusive: ITG

Terry Flanagan

Nasdaq’s experimental pricing program with lower access fees for 14 stocks has thus far not generated much interest, except among high-frequency traders, according to Investment Technology Group.

“As the buy side has become much more interested in reducing or eliminating maker/taker fees, this pilot has provided the first opportunity to experiment with a lower fee structure on a major exchange,” said Philip Pearson, head of algorithmic consulting at ITG, in a report. “Unfortunately, it seems that thus far the participants who have responded most quickly (and negatively) to the changes have been the HFT community.”

On February 2, 2015, Nasdaq initiated a pilot program for experimental pricing for 14 symbols: seven Nasdaq-listed and seven NYSE-listed. For this group, it adopted a new 5/4 pricing model replacing the existing 30/29.

“The goal was to improve overall market quality and, in doing so, direct a larger portion of trading to their exchange away from both lit competitors and off-exchange platforms such as ATSs,” said Pearson. “What does seem more certain is that it has succeeded in decreasing Nasdaq’s market share, which is surely not their intention. Nasdaq will have to market these changes to institutional brokers for it to pay off, as the HFT community seems to disfavor lower rebates in all but the deepest-queued names.”

From a market-quality perspective, it is too early to discern whether this has had a positive or negative effect on the market as a whole: the effect was most pronounced in some symbols in the first few days of the pilot. It is possible that market participants were waiting to see some results before adjusting their routing strategies.

The pilot is intended to generate much-needed data about the impact of the level of access fees on areas that matter most to investors and public companies such as the level of off-exchange trading, price discovery, trading costs, displayed liquidity and execution quality.

To analyze the effect of the change in rate, ITG compared the pre-pilot month of January 2015 with the results of February 2- February 25 (18 trading days) for the pilot stocks. It wanted to test the theory that the change should result in measurable improvement to price discovery, as well as whether or not Nasdaq benefits from the resulting effects.

“We hypothesized that the results would be insignificant, assuming that most market participants would not invest the resources to adjust routing behavior for such a small universe,” Pearson said. “The results were surprising in that there were definite changes to the market structure and quality. This demonstrates how price sensitive some market participants have become.”

The brokerage community, if interested in improving performance on behalf of their clients, should pay heed, according to the ITG report.

“It has been rumored that Nasdaq has plans to expand this pilot to a broader symbol set, an idea which we welcome,” Pearson said. “One of their biggest hurdles will be the informational and marketing effort to make people see the benefits of a low fee exchange. Without some kind of rallying cry prompting a more global adoption, the idea will probably fall by the wayside because of the decreased market share we have seen so far.”

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