Beginning this month, the Nasdaq OMX PSX equities exchange has returned to trading all symbols using its Price Setter Pro Rata matching logic.
The matching logic, which is only eligible for displayed round-lot orders, means orders that the best bid or offer on the PSX will be guaranteed a 40% allocation when incoming marketable orders are executed. The remaining 60% of a given order will be executed against resting orders using a size pro rata allocation. Orders only will lose price-setter status if another order sets a better price and is executed.
Nasdaq OMX originally launched the pro rata model on Nasdaq OMX PSX in October 2010, but retired it in May 2013 when the exchange’s market share fell below 1% in favor of focusing on the trading of exchange-traded funds and exchange traded notes.
The model seems sensible to Sayena Mostowfi, senior analyst at industry research firm Tabb Group. “This makes sense for a portion of the market and it is is how most of the equity options markets operate,” she explained. “It would not be a bad assumption that it would appeal to a portion of the population.”
Whether the model will attract less liquid small and mid-cap stocks, she is not sure. “The problem with these stocks is trying to aggregate their liquidity at a point in time,” Mostowfi added. “Over time this liquidity has migrated to the market’s open and close.”
Introducing new matching-logic models can only help the equities market, which currently is stuck in a ‘one size fits all model’ that does not work for every stock or market participant.
Mostowfi sees alternative trading system (ATS) operators also introducing alternative matching-logic models. The most noticeable model is the ‘price-broker-capacity-time” model used by the Canadian equities market and implemented by start-up ATS IEX.
“Every matching logic comes with its own pros and cons and it is up to market participants to vote with their order flow on which works best for their type of execution, execution quality and their trade’s level or urgency,” she said.