A US pricing pilot conducted by Nasdaq over the past three months has dented the exchange’s market share, but also helped improve market quality, according to an analysis by ITG.
Nasdaq’s pilot scheme took place between February and May, offering experimental 5/4 pricing for 14 highly liquid stocks, compared to its usual 30/29 pricing model for taking and making liquidity respectively.
ITG has analysed how those stocks traded in January 2015 and compared it with the results from the pilot period, and found traded volume on Nasdaq fell 3% between January and February and 4.5% over the whole period.
Quote volume also fell by 5.9% in the first month and 7.1% during the whole trial.
One noted development was the decrease in quoted volume was larger than the decrease in traded volume. Nasdaq’s own analysis suggested this was because smart order routers were targeting Nasdaq earlier due to the lower fees and ITG said its own results support this theory.
The top five liquidity providers in the pilot stocks represented 44.5% of executed volume in the three months before the trial but just 28.7% from February through to April, suggesting a decline in rebate-harvesting activity by top market makers.
But while market share fell, Nasdaq also saw an increase in overall quoted volume for the affected stocks. During May, some of the symbols saw as much as 40% more liquidity at the top of the book and 11 of the 14 saw an increase in quoted volume.
However, much of this increase in liquidity did not appear until mid-March following a volatile January and February so could be a sign of changing macro economic conditions.
An analysis of ITG’s own SLimit algorithm found that, as it targets performance without regard for fees or rebates, it traded at Nasdaq significantly more often due to reduced queue lengths. ITG said the combination of shorter queues and more liquidity takers proved beneficial for institutional investors who wanted to passively trade.
ITG added that it is hopeful the pilot scheme will be used as evidence that there would be value in increased competition offering different pricing models in US markets. However it counseled against forcing the market to adopt lower rebates, arguing that some market makers would leave the market entirely if rebates were curtailed, resulting in thinner markets and wider spreads overall.