Electronic order books such as BATS Exchange, Direct Edge and Nasdaq Market Center have overtaken exchange specialists and dedicated market makers as the most active traders of New York Stock Exchange (NYSE)-listed equities, according to consultancy Celent’s latest study of NYSE market execution quality. However, they are not necessarily the fastest nor the best executors.
Electronic order books’ market share of NYSE issues rose to 49.5% in Q2 2009 from 41.4% in Q3 2008, the last time Celent conducted the study. Meanwhile, specialists’ market share fell to 36% from 44.4% over the same period.
Specialists’ market share will likely be even lower in Celent’s next study. Market maker Van der Moolen, which had a 9% market share of NYSE issues in Q2 2009 according to Celent, filed for bankruptcy on 9 September.
The Celent analysis only includes orders under 10,000 and over 100 shares and that are covered under the Rule 605 of Regulation NMS, which requires firms to disclose certain data to facilitate comparison of execution quality.
While electronic books may have the biggest market share, they are not necessarily the fastest or the best executors of NYSE stocks. The Celent study found that, with the exception of the smallest orders covered (100-499 shares) specialists executed quicker than the electronic books, continuing the trend revealed in the 2008 analysis. Celent also discovered that electronic books’ execution was between 0.04 and 0.05 milliseconds per order slower in Q2 2009 than Q3 2008.
However, specialists were the worst at achieving price improvement. They only improved prices 2.9% of the time for the 100 most active NYSE issues in the 2009 study, compared with 28.6% for electronic order books and 76.5% for non-specialist market makers.
While electronic order books have only recently gained the top spot in NYSE-listed stocks, they retained supremacy for Nasdaq issues, according to Celent’s Nasdaq execution quality analysis for Q2 2009. They commanded 78.2% of the market, compared with market makers’ 18.1% and other players’ 3.7%.
However, the analysis also shows that market makers have gained some ground on the electronic books since the Q3 2008 study. Market makers’ share of Nasdaq-listed stocks was up from 2008’s 14.6%, while electronic books’ share was down from 2008’s 81.8%. Celent suggests the shift could have been caused by the increased volatility prompted by the market downturn.
As with NYSE stocks, electronic order books execute much faster than market makers, but are worse at achieving price improvement. Market makers improved prices 79.5% of the time in the 100 most active Nasdaq stocks, while electronic order books only improved prices 24.5% of the time. Furthermore, electronic books’ price improvement frequency has deteriorated from its 2008 level of 30.4%, while market makers’ has increased from 71.5%.