Market makers offer the best overall price improvement in NYSE and Nasdaq listed stocks, but are losing market share to faster electronic order books (EOBs).
This is the conclusion of two reports on the trading of stocks listed on the two US exchanges, produced by research firm Celent. The analyses measured the quality of trade execution in all market centres – securities exchanges, alternative trading systems and market makers – which are required to submit trading statistics to the Securities and Exchanges Commission (SEC). Exchanges and other trading venues were categorised as EOBs for the purpose of the study, with brokers defined according to their designated role with an exchange e.g. market maker.
For NYSE shares, EOBs, offered the fastest execution speed for orders of between 100-499 shares, at less than 0.05 seconds.
However specialists, who are tasked with encouraging the flow of liquidity, and designated market makers (DMMs), firms that make markets for specific stocks, offer improved speed for larger orders.
For trades of 500-1,999 NYSE shares, specialists and DMMs had an average execution speed of 0.01-0.02 seconds rising to around 0.05 for trades of up to 9,999 shares, at which point execution speed for EOBs had slowed to 0.1 seconds.
Market makers, dealers who compete for investor orders by displaying buy and sell prices, were by contrast executing at speeds between 0.65 seconds for small orders of 100-499 shares to 1.1 seconds for larger orders at up to 9,999 shares.
However, they provided price improvement more than 80% of the time on NYSE stocks and only saw below-quote prices in just 2.5% of executions.
By contrast, specialists and DMMs improved price in 10% and EOBs in 33% of cases.
For Nasdaq stocks, EOBs consistently had the highest execution speed ranging from 0.01-0.02 seconds for orders of 100-499 shares to 0.02-0.03 seconds for orders of 5,000-9,999 shares.
By contrast market makers saw execution speed rise from around 0.04 seconds for orders up to 1,999 shares, to 0.27 seconds for orders of over 2,000-4,999 shares and increasing to over 0.3 seconds where 5,000-9,999 NYSE shares were concerned.
Market makers achieved price improvement around 77% of the time where order entry firms, i.e. broker-dealers that enter customer orders but do not commit capital, achieved 80% price improvement. However market makers only saw the price fall below the quote around 3-4% of the time, compared with around 6-7% for order entry firms.
Despite this improvement in execution quality, market makers have seen their share in trading of Nasdaq shares fall from 16 to 15% and from 12% to 11% for NYSE shares. By contrast EOBs have increased their market share,from 81% to 83% for trading of Nasdaq stocks and from 51% to 56% of NYSE stocks.
Of the EOBs for NYSE stocks, Level ATS, EDGA Exchange and NYSE Arca were the top three by ranked by price, with BATS Y Exchange, BATS Exchange and EDGA Exchange ranked top by speed.
Citadel, ATS and UBS Securities were the highest-ranking market makers by price for NYSE stocks, while Knight Equity, Citadel Derivatives and Citi-owned ATD were top three by speed.
NYSE Arca, EDGX Exchange and EDGA Exchange were the highest three ranked EOBs for price improvement in Nasdaq-listed stocks, with EDGA Exchange, BATS Exchange and Nasdaq Market Center found to be the best by speed.
ATD, Knight Equity and UBS Securities were the highest ranked according to price improvement for Nasdaq shares and Knight Equities, UBS Securities and Pershing were the top three for speed. EDGX and EDGA Exchange are both operated by stock exchange operator Direct Edge.
The results were compiled from data submitted to the SEC via what are commonly known as Rule 605 reports, after the rule that requires market centres to publish trading volume related statistics on a monthly basis.