Equity Exchanges Jockey For Position

Terry Flanagan

The flurry of market structure proposals reflects a jockeying for position among U.S. equity exchanges as the Securities and Exchange Commission mulls eliminating maker/taker pricing and other changes.

“It’s an interesting time in the marketplace, where there is clearly a lot of competitive positioning and demand from end users for new and different types of trading protocols,” said Adam Sussman, head of market structure and liquidity partnerships at Liquidnet. “It’s part being driven by regulation and positioning around that. How much of this will actually result in a new unique liquidity or how many of these ideas will actually go forward and gain any type of traction is an entirely different question.”

An example is the NYSE’s proposed mid-day auction, which would occur between 11am and 2pm. Only stocks with an average daily volume of 1 million shares or fewer would be eligible, but the NYSE would look at other factors to make sure the auction would be suitable. It would start with a five-minute trading pause, followed by the Designated Market Maker re-opening the stock at a single equilibrium price. While the NYSE states that the preferred methodology would be electronic, the DMM would have the flexibility to run the auction manually.

Adam Sussman, Liquidnet

Adam Sussman, Liquidnet

“One must admire the tenacity of the NYSE in its attempt to launch block functionality,” said Sussman. “As with any new mechanism, the challenge for the mid-day auction is to attract enough diverse order flow to avoid massive order imbalance and market impact.”

Although normal methodology would keep the auction price within the Limit Up/Limit Down Bands, this could be bypassed if there is a significant order imbalance. “They’ve put some parameters around that and said, ‘We won’t break the band that would trigger Limit p/Limit Down, but it can be outside the NBBO,’” Sussman said. “I think that then brings up the question, ‘If NYSE can print outside the NBBO, why can’t we all print outside the NBBO?”

The SEC recently announced the formation of a Market Structure Advisory Committee. “This expert group will focus on the structure and operations of the U.S. equity markets and provide a valuable mechanism for the Commission to receive input and advice concerning market structure issues,” said SEC chair Mary Jo White in a Feb. 20 speech. “Through these and other empirically driven efforts, we will continue to focus on ways to improve the existing structure of our equity markets.”

In conjunction with a trade-at rule, NYSE has proposed reducing the access fee cap from 30 mils ($0.003) to 5 mils. As a result of the cap and the advent of maker-taker pricing, many trading centers charge takers of liquidity a fee that is close to the maximum fee allowed, while rebating a portion of the fee to providers of liquidity.

“It seems to offer a little something for everyone,” said Sussman. “The exchanges aren’t necessarily negatively impacted by capping access fees at 5 mils since maker/taker is also eliminated in the proposal. Most people believe the net capture would be around 3-4mils. If a few percentage points of market share migrate to the exchanges due to trade-at, and net capture is 4mils, exchanges do well.”

Featured image by Sportlibrary/Dollar Photo Club

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