Global exchange group Nasdaq OMX has recovered its US market share from last May’s nadir, while the fortunes of the New York Stock Exchange, part of the NYSE Euronext group, have continued to wane.
Nasdaq’s matched market share of all US equities trading, including its BX secondary trading platform, was 23.8% in March according to monthly trading statistics published by the exchange, slightly lower than the 24.5% it achieved in February but higher than the low point of 20.8% it reached in May last year. Nasdaq’s matched market share was 22.8% in March 2009.
By comparison, the New York Stock Exchange’s monthly figures show that its market share reached a new low of 25.6% in March, down from 27.7% in February and 32.3% in March 2009.
An unusual alignment of market developments – including flash orders and an increased propensity to trade cut-price stocks in dark pools – may have temporarily dented Nasdaq’s competitiveness in 2009. “The low-price stock phenomenon has abated somewhat, as has the flash order controversy, and so has the pressure on the established US exchanges,” said Justin Schack, director, market structure analysis at boutique US broker Rosenblatt Securities.
Observers contend that flash orders helped equities trading platform Direct Edge in particular take market share from exchanges. But flash orders’ influence has waned since August last year, when the US Securities and Exchange Commission indicated a ban was likely. Both Nasdaq and fellow US bourse BATS Exchange had launched their own flash functionality in June 2009 in an apparent attempt to defend market share, but both announced in August that they would voluntarily suspend the functionality from 1 September. The SEC followed with a proposed ban on 18 September.
While Direct Edge did not suspend its flash functionality, known as the Enhanced Liquidity Provider programme, it appears the controversy surrounding flash orders has reduced use – Direct Edge’s matched market share, according to the platform’s own figures, reached an all-time high of 12.90% in August 2009, dropping back to 11.84% in September and settling in the 10.2-10.3% range for the remainder of the year.
A further, and perhaps bigger, reason for Nasdaq’s resurgent market share could be a weaker appetite for financial stocks that had fallen in value as a result of the global crisis, e.g. banking group Citi and mortgage firms Fannie Mae and Freddie Mac. This phenomenon initially drove more trading onto alternative trading systems because firms typically do not like to trade low-value stocks on exchanges that offer high maker rebates and correspondingly high taker fees, opting for places where it is cheap or even free to take liquidity. Speaking to theTRADEnews.com in October, Brian Hyndman, Nasdaq OMX’s senior vice president of transaction services, acknowledged the role of non-displayed trading in his firm’s declining market share during 2009. “Dark pools and internalisation probably took as much market share from us this year as our competitors,” he said.
A further factor helping Nasdaq OMX is the success of its BX trading platform, which employs an inverted maker-taker scheme paying liquidity takers a rebate of $0.0001 a share and charging liquidity providers $0.0003 a share. BX’s market share has increased steadily since its launch in January 2009 and its matched market share of US equities trading was 4.52% in March 2010.
BX’s rebate for taking liquidity makes it attractive to firms that want to trade low-value shares. “Although those phenomena [of low-price stock trading and flash orders] have abated somewhat they are still present to a degree,” said Schack. “To the extent they are, BX helps Nasdaq capture some of those flows.”
While the New York Stock Exchange’s market share has continued to decline despite Nasdaq’s slight resurgence, the Big Board might soon gain ground on its rival. NYSE has plans to start trading Nasdaq-listed (Tape C) securities on its NYSE Amex platform on an unlisted trading privilege basis, which means that Nasdaq-listed shares will be available for trading in a floor-based environment for the first time. NYSE has yet to set a data for trading Nasdaq stocks on Amex, but has submitted a filing to the SEC and will be testing the capability on 1 May and 15 May.
“We expect NYSE could pick up at least a percentage point or two of market share that way, and that could hurt Nasdaq and others that are trading Tape C stocks,” said Schack.
However, non-displayed trading is continuing to have a detrimental effect on the collective market share of the US’s top four equities trading venues – NYSE, Nasdaq, Direct Edge and BATS Exchange. The four firms’ collective US market share stood at 69.1% in March 2010, down from 76.7% in March last year.
NYSE Euronext warned of the negative impact on price discovery of non-displayed trading in its recent submission to the SEC’s ‘concept release’, which sought comments and evidence on the functioning of the US equities market. The exchange group estimated that dark pools, alternative trading systems and other forms of internalisation represent 30% of the total share volume in NMS stocks, which is fragmented across more than 50 venues.
“We recognise the value of undisplayed liquidity, particularly for those market participants seeking to trade in large size, and we do not oppose all forms of undisplayed liquidity utilised in the current market structure,” read the NYSE Euronext response. “Nevertheless, NYSE Euronext believes market structure regulation must provide protection to displayed liquidity, consistent with the goals of Regulation NMS, and supports the Commission’s consideration of regulatory changes to maintain such protection.”