The London Stock Exchange (LSE) has announced plans to introduce a rebate for posting liquidity in large-cap stocks in a bid to attract more algorithmic and statistical arbitrage (stat-arb) order flow.
It will also shift to a value-based fee for taking liquidity in large-cap stocks from a volume-based system. Brokers will be charged less the more value they trade on the exchange. The exchange previously offered volume-based discounts to the taker fee.
As a further incentive for algorithmic and stat-arb traders, the exchange has abolished fixed fees that previously applied to every trade. The 7.5 pence execution charge and the standard 1 pence order management charge will be waived for all stocks. “These two charges acted as a disincentive to stat-arb trading. They represented the greatest frictional cost to them,” LSE spokesman Patrick Humphris told theTRADEnews.com.
Although pan-European multilateral trading facility Chi-X already offers a maker-taker model and cheap pricing, and the other pending MTFs plan to when they launch, the LSE said it made the changes in response to growing stat-arb and algorithmic trading volumes rather than the emergence of new rivals.
“It is not so much a response to competition or to MiFID,” said Humphris. “It is more about working with this underlying trend to try and incentivise as much of that trading to come on to the order book, so that it becomes increasingly deep and liquid.”
He added, “Once you do that, possibly you are then even able to increase the interaction between the order book and other venues.”
In theory, the new pricing scheme could allow brokers to trade more cheaply on the LSE than Chi-X. Chi-X charges a taker fee of 0.30 basis points, and pays a maker rebate of 0.20 basis points. Assuming a 50:50 maker-to-taker ratio, the trader would pay 0.10 basis points to trade on Chi-X. The LSE’s cheapest taker fee is 0.45 basis points, and its most generous maker rebate is 0.40 basis points, meaning that the same trade would only cost 0.05 basis points on the LSE.
However, while Chi-X’s tariff applies to all trades, brokers would have to execute more than £25 billion-worth of trades on the LSE a month to take advantage of the highest maker rebate, and those trading £2.5 billion a month or less get no rebate. On the taker side, members would have to execute more than £30 billion-worth of trades a month to get the lowest fee.
Humphris acknowledged that the thresholds for the most attractive fees and rebates are high. “There aren’t any firms who are immediately in the top bands, but to some extent that is deliberate because if you had people in all the top bands already, the incentive isn’t as strong,” he said.
The exchange decided to move to a value-based pricing scheme because it believes value is the best measure of liquidity, and so value-based discounts and rebates are the best reward for this. And because brokers tend to charge a percentage of the value of the trades they execute on behalf of their clients, the LSE feels value-based pricing suits them better.
The new LSE tariffs will take effect on 1 September.