09.23.2011
By Terry Flanagan

NOM Bolsters Rebates, For Some

The Nasdaq Options Market (NOM) is launching a pricing schedule Oct. 3 that will reward broker-dealers providing higher volumes of retail and institutional customer orders, a move reflecting the ever more concentrated options market that may prompt similar moves among competing exchanges. Nasdaq is also introducing two new pricing tiers that aim to draw customer orders from broker-dealers with different business mixes.

NOM’s volume has grown steadily since its de novo launch three and a half years ago and now regularly exceeds 4%, a performance only rivaled by BATS Options, which executes a similar volume of trades after launching in early 2010. Both exchanges offer the so-called market-taker pricing model, in which liquidity providers receive rebates and liquidity takers are charged fees.

NOM’s new pricing model, which it filed for Sept. 12, increases the rewards for market participants providing even higher volumes of orders.

“The filing represents an ongoing effort by NOM to attract order flow by enhancing its maker/taker pricing model,” said Andy Nybo, head of derivatives research at Tabb Group. “I fully expect NOM’s filing is being closely analyzed by its competitors, who will tweak their own pricing models to remain competitive.”

NOM’s fee changes, which impact the highly liquid options series quoted in pennies that now comprise the majority of options trading volume, increase rebates for providing liquidity but only at significantly higher execution volume levels. The rebate changes only apply to so-called customers, or broker-dealers executing orders for retail and institutional investors.

A partner at a high-frequency trading firm noted NOM’s execution volume at 12 million to 15 million contracts per month, and that to qualify for a meaningful rebate requires executing at least 500,000 contacts per month. He added that there
“realistically eight to 12 industry participants who qualify for rebates, and it’s generally the same players across all exchanges.”

So while the rebates are a big attraction and meaningful in the scope of the industry’s profits, only a small pool of industry participants benefits, and instead of growing the pie it’s simply being redistributed, he said. He added, “This is counterproductive to industry growth—benefitting a small number of large firms at the expense of the rest—and ultimately it limits growth and competition.”

Specifically, NOM is leaving unchanged the $0.26 per contract rebate for broker-dealers executing up to 24,999 contracts per day. The tier 2 rebate increases to $0.34 per contract from $0.32 per contract, but it now applies to execution volume between 25,000 contracts per day and 59,999 contracts per day, an increase from the current upper limit of 39,999 contracts per day.

The Tier three rebate increases to $0.38 per contract from $0.36 per contract, and the new execution volume to capture that credit is between 60,000 contracts per day and 124,999 contracts per day, up from between 40,000 and 59,999 contracts.

In the fourth tier, the rebate is increasing to $0.40 per contract from $0.38 per contract, and broker-dealers must execute at least 125,000 contracts per day to receive the higher rebate, up from more than 60,000 contracts per day.

NOM is also adding two other rebate tiers to draw customer orders. One will provide the $0.40 rebate for providing at least 60,000 customer contracts and at least another 60,000 contracts of market maker liquidity. “In other words, Participants that add significant liquidity as market makers can receive the same Customer rebate as Participants that provide substantially more Customer order liquidity,” the filing says.

In the sixth tier, broker-dealers qualifying for rebates on Nasdaq’s equity exchange can also qualify for an additional $0.01 per contract on NOM if they contribute 25,000 or more contracts.

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