Friday, December 23, 2005

Nasdaq Offers Rebates On NYSE-Listed Trades

The Nasdaq Stock Market last week launched its first-ever rebate program for trading New York Stock Exchange-listed securities through Nasdaq in an aggressive attempt to siphon liquidity from the floor before the Big Board moves to a hybrid model. Earlier this year, Nasdaq eliminated transaction charges for routing trades to DOT, NYSE's automated trading platform. Nasdaq has never before offered rebates for trading securities listed off-Nasdaq. The lower pricing could help Nasdaq wrest more market share from the Big Board in some of the most highly traded securities, traders said. "The NYSE will continue to provide the most compelling value proposition for our customers trading listed securities," a spokesman responded.

The new pilot will give liquidity providers a 50-cent credit per 1,000 shares of NYSE-listed securities, pushing already low prices for listed securities even lower. "Nasdaq is definitely targeting New York [Stock Exchange] with aggressive pricing. It's trying to move liquidity off the floor before hybrid comes," said Larry Tabb, founder of consultancy Tabb Group. NYSE has primarily been a manual market--a weakness that has driven some traders to the Nasdaq. Hybrid merges NYSE's traditional open-outcry auction system with an electronic system. Nasdaq's current market share is about 19% of listed trading valued at $56 billion daily, or nearly $11 billion a day.

The Big Board is expecting to lose some market share once Reg. NMS and hybrid market go into effect next year; it recently estimated that its market share would slip to 74% over the next two years, down from the 80% the exchange forecasted earlier. However, volume in listed trading is expected to double as the NYSE becomes an automated market and opens up access to other exchanges under Reg. NMS requirements. Trading executives say its market share could sink to around 60% if NYSE remains expensive and hits any snags with its new technology.

Nasdaq, competitive on both pricing and technology, chose 40 large-cap, high volume stocks, such as Exxon Mobil Corp., General Electric Co. and Pfizer, for the rebate pilot and will most likely add more stocks and keep rebates beyond the three-month pilot period, several Nasdaq traders said. "The move is consistent with our aggressive pricing strategy and the strategy to gain more trading in NYSE-listed stocks," a spokeswoman said, declining to comment further.

The NYSE has no plans to lower its prices to fight competitors off, exchange officials said. The exchange still has by far the most liquidity in NYSE-listed securities; the question is how they will keep it in a faster electronic world, analysts said. "Pricing will certainly be an issue, but even more important is how quickly [the Big Board] can migrate liquidity onto the electronic platform," said Harrell Smith, analyst with Celent. The Big Board has recently stepped up its push for educating much of its membership as well as other brokerage firms on the viability of the hybrid system, he added.

© 2005 Euromoney Institutional Investor PLC.

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