Exchange operator NYSE Euronext has inflamed relations with other trading venues by reducing tick sizes on its European markets from levels agreed in 2009, citing changes in the competitive landscape. In a statement the firm said, “When we agreed to implement the Federation of European Securities Exchanges (FESE) tick sizes, we reserved the right not to use all bands. Recent changes in trading patterns make us believe that the quality of the market could be improved significantly by a reduction in the tick size on higher-priced stocks, which would improve market quality, because tighter spreads benefit investors.”
However rival venues, which also agreed to stand by tick size limits agreed with FESE in summer 2009, after the industry teetered
“There’s been no consultation with any other markets or with their members as far as we can ascertain,” said Paul O'Donnell, chief operating officer at multilateral trading facility (MTF) BATS Europe. “Their action upsets the gentlemen's agreement that was in place and undermines all the good work that has been done on harmonisation.
Furthermore, it is bad for the market because the tick size levels will be way too low for many of the affected stocks.”
In theory, the greater the number of tick sizes between prices, the more scope for a high-frequency trader to jump the order queue ahead of an institutional trader.
O'Donnell called on NYSE Euronext to provide data to support its actions, insisting that the spread leeway, i.e. the number of free ticks inside of the spread, is optimal at between two and four. By reducing the tick size at which a €1 stock from €0.10 to €0.05, for example, the exchange is effectively doubling the number of steps between €1.00 and €1.10 from 10 to 20. “One of the stocks affected by this change will, in our estimation, have a spread leeway of 33. That’s 33 empty ticks between the bid and the ask. That’s bad market structure by any measure,” says O'Donnell.
In summer 2009, NYSE Euronext implemented FESE tick size table four in full i.e. using four bands. In this table, stocks with prices from 0 to €9.999 have a tick size of €0.001, prices from €10.000 to €49.995 have a tick size of €0.005, prices from €50.000 to €99.99 have a tick size of €0.01 and prices of €100.00 and above have a tick size of €0.05.
NYSE Euronext has now decided to utilise only the first two bands of FESE's table four for blue-chip stocks traded on its Paris and Amsterdam exchanges, i.e. stocks priced 0 to €9.999 have a tick size of €0.001 but all stocks above €10 will have a tick of €0.005. In effect the change will permit that the minimum spread for some stocks will be narrowed from a penny to a half-penny. “Because the competitive landscape has changed significantly, we decided to review our market structure,” read the NYSE Euronext statement. “We felt our obligation to our customers to provide the best possible market quality made a lengthy consultation with market participants impractical and we decided to make changes. As we are still awaiting regulatory approval for our change, we believe others have sufficient opportunity to comment on it in their own filing on MIFID II.”