NYSE Tweaks Trading Prices to Appeal to High-Frequency Firms

The New York Stock Exchange is changing prices for transactions on its market for the first time since May as it seeks to lure more business from high- frequency trading firms, according to an exchange notice.

Brokers and traders will pay 23 cents per 100 shares starting in January to execute against bids and offers at the exchange, 2 cents higher than the current charge. Those placing orders that wait for executions at the Big Board, the largest U.S. equities venue, will get a rebate of 15 cents, up from 13 cents. The difference between the fee and payout will stay the same.

Higher pricing enables NYSE to give more money to the 10 firms that make markets on the exchange as so-called supplemental liquidity providers, which now account for almost 15 percent of its trading. NYSE will also offer them different rebates based on the volume they add on the exchange.

“The tiers are another incentive to firms to grow the SLP program,” said Colin Clark, senior vice president for strategic analysis at NYSE Euronext. “There are a variety of different participants with different activity levels, so layering in some tiers to drive more liquidity-provider activity is what we’re after.”

Adding Liquidity

U.S. equity exchanges adopted pricing programs that reward firms for posting bids and offers on their platforms after a decade of reform cut the profitability of market making. Faster computers and measures such as pricing stocks in penny increments reduced the so-called spread that once compensated professionals for keeping trading orderly, spurring exchanges to pay rebates to firms that carry out the same function through high-speed strategies.

NYSE’s share of trading in stocks listed on its market in the fourth quarter is expected to be 23.3 percent, according to a Barclays Capital research report yesterday, down from 25.5 percent in the third quarter and 25.6 percent a year earlier.

Firms that provide a daily average each month of 50 million shares traded will receive rebates of 22 cents per share, or a penny lower than the fee to execute immediately. Firms meeting lower volume thresholds will get 21 cents or 20 cents. Currently, all SLPs adding more than 10 million shares across their assigned securities get a penny less than the fee charged to remove liquidity.

Maker-Taker

If SLPs provide and take roughly the same number of shares, maintaining a 1-cent spread between the fee and rebate isn’t likely to affect their trading. For those primarily adding liquidity, the higher rebates will enable them to earn more to help offset the bid and offer prices they send the exchange. SLPs must quote at the national best bid or offer -- the highest price at which investors can sell shares and the lowest at which they can buy -- an average of 10 percent of the day each month to get higher rebates than are available to other member firms.

Trading by the SLPs accounted for 14.6 percent of NYSE volume in November, up from 12.4 percent in September, Clark said. High-frequency firms Tradebot Systems Inc. in Kansas City, Missouri and New York-based HRT Financial LLC became official market makers on NYSE in September.

“We’ve seen a meaningful increase with the addition of Tradebot and HRT,” Clark said. While Spear, Leeds & Kellogg Specialists LLC, owned by a division of New York-based Goldman Sachs Group Inc., left the program this year, another brokerage unit within the bank remains an SLP.

Market Makers

NYSE also has five “designated markets makers,” including a New York-based unit of Barclays Capital, the investment banking arm of Barclays Plc in London, and Spear Leeds. Those firms oversee the opening and closing auctions in the stocks they represent and can choose to meet higher quoting requirements to earn bigger rebates. While each stock has one DMM, it may have multiple market makers.

Nasdaq Stock Market, the second-largest U.S. exchange, had 136 market makers in November, with an average of 15 per security, according to the company’s website. Nasdaq OMX Group Inc. doesn’t give market makers better pricing than other firms trading on its market.

NYSE Euronext is also introducing a discount tier for orders sent to the Big Board’s closing auction and new pricing for trading on NYSE Amex.

NYSE, Nasdaq

While the largest exchanges -- including NYSE and Nasdaq -- employ what’s called maker-taker pricing that pays those providing liquidity on their venue and charges firms executing against those orders, an alternative pricing setup has gained traction over the last couple years.

Four stock markets -- BYX Exchange, EDGA Exchange, Nasdaq OMX BX and CBOE Stock Exchange -- do the opposite of NYSE, paying traders to execute against orders at their markets while the firms that submitted those bids and offers are charged a fee. CBSX, one of the smallest stock exchanges, pays firms 18 cents, the highest rate, for orders executed immediately.

BYX is owned by Bats Global Markets, based in Kansas City, Missouri. EDGA Exchange is run by Direct Edge Holdings LLC in Jersey City, New Jersey. The companies run two exchanges each, and totaled 20 percent of U.S. equities trading in November.

Nasdaq OMX BX is also altering its pricing in January. It will pay firms executing immediately 14 cents instead of its current 2 cents, and will charge them 18 cents instead of 4 cents for providing orders. That pricing replicates what’s available on CBSX, owned by Chicago-based CBOE Holdings Inc. and a group of brokers.

CBSX, based in New York, tested the pricing starting in August and expanded it to all stocks in October as it gained volume. In November, CBSX’s share of trading in Citigroup Inc., one of the most actively traded stocks, was 0.9 percent, compared with less than 0.1 percent a year earlier, according to data compiled by Bloomberg.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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