US buy-side traders have welcomed the impending launch of Nasdaq OMX's new PSX trading venue, with some expecting trade sizes on the platform to be at least double the current average.
In contrast to the majority of US stock exchanges which work on a price/time priority, i.e. trades with the best price that arrive first get executed first, Nasdaq PSX, which will go live on 8 October 2010, will operate under a price/size priority.
This means that the trader displaying the best price will receive fills from an incoming order based on their displayed size. For example, if there were two orders in the same stock for 6,000 shares and 4,000 shares, an incoming order of 1,000 shares would be allocated at 600 to the former order and 400 to the later.
“Our aim is to bring greater size, more liquidity and better transparency to the market. Some customers have indicated that this model may push average trade size up to around 5-600 shares,” Brian Hyndman, senior vice president, transaction services, Nasdaq OMX, told theTRADEnews.com. “PSX will ensure that market participants need not rely on having the quickest technology to get the best execution.”
Hyndman reports that the average trade size on Nasdaq OMX is around 225 shares.
According to Mark Kuzminskas, director of equity trading at buy-side firm Robeco Investment Management, the ability to trade in larger size would be “very appealing” for buy-side traders. The continued growth of high-frequency trading in the US – now estimated to account for around 70% of all trading activity – has led market operators to position their platforms in a way that rewards speed, rather than size of execution, which some claim disadvantages traditional long-only institutions.
“In the nineties, when buy-side traders negotiated blocks for cash equities, brokers divided shares on a pro rata basis, similar to the PSX model,” said Kuzminskas. “As the model moved more towards a price/time model, this led market participants to move into the dark to avoid the associated information leakage risks. PSX is one of the first alternative methods I've seen of trying to combat the problem of smaller execution sizes on public venues.”
But Kuzminskas also notes that PSX will need to gain a critical mass to avoid suffering the same fate as block trading venues such as Pipeline and Liquidnet, which have lost market share in recent months.
“Block trading venues need a critical mass to have significant participation rates and lower volumes coupled with the proliferation of exchange-traded funds over single-stock trading seems to have impacted the market share these venues,” he said. “PSX could double or triple existing trade sizes, but I think this will differ from stock to stock and depend on building a critical mass of liquidity.”
But while admitting that deviating from the traditional price/time model could be risky, Hyndman is confident that the current market environment will make PSX a success.
“If we are successful, I'm sure other trading venues will follow suit,” he said. “There is a certain degree of risk by using a new model, but we built this after discussions with clients to determine what would be a good use of our third exchange licence.”
PSX will operate under the trading licence of Nasdaq OMX PHLX, formerly the Philadelphia Stock Exchange, which was bought by Nasdaq OMX in 2007.