- Sarah Jacobs
- The New York Stock Exchange has launched a new market for small and mid-cap securities called NYSE American. NYSE American employs a so-called speed bump, a feature made famous by rival exchange IEX. The NYSE is offering big rebates to its designated electronic market makers to bring liquidity to the market.
IEX, which gained exchange status last June, challenged the industry’s status quo by introducing a 350-microsecond trading “speed bump.” The idea has been controversial and was met with fierce opposition from established trading platforms – including the NYSE.
These speed bumps are intended to slow trading down and level the playing field between big investors and tech-driven high-speed traders.
Then, in January, the NYSE announced it wanted to introduce a speed bump on one of its own markets. That market, NYSE American, is a market for small and mid-cap companies and launched Monday. And the NYSE is offering market makers big rebates on trades executed on the new exchange.
According to a price list from the NYSE, it offers designated electronic market makers, those firms which provide liquidity for the 354 NYSE American-listed securities, a payment of $.0045 per share. The difference between what the NYSE is paying out in rebates on these specific securities and what it is taking in via fees from market takers, the beneficiaries of the liquidity provided by market makers, is glaring.
Market takers will be charged just $.0002 per share to trade on NYSE American, representing a $.0043 difference on every trade for NYSE American-listed securities.
In all other US securities, NYSE American charges a small fee to both sides of the trade. About 8,000 securities can trade on NYSE American. On Monday, 85% of NYSE American’s trading volume was of NYSE American-listed securities, according to data from Bloomberg.
The point of the rebates, according to the NYSE COO Stacey Cunningham, is to make the markets more liquid.
“We believe it critical for a listing exchange to ensure a high-quality displayed quote to reduce the cost of capital and share price volatility for its issuers, and in the absence of broader market structure reform, exchange-paid quoting incentives are a necessary mechanism in a highly fragmented US marketplace to support liquidity for listed companies,” Cunningham said in a letter to clients emailed to Business Insider.
The rebates the NYSE is paying to market makers on its NYSE American exchange are among the highest in the industry and could pose a threat to IEX’s business. Market makers would likely opt for an exchange offering incentives over one that isn’t, according to Don Ross, CEO at PDQ Enterprises, a broker-dealer firm operating the CODA Markets ATS. He told Business Insider it’s a risk for IEX to consider.
“If I were IEX I would be worried,” Ross said.”It sets a precedent for the NYSE to take market share away from IEX.”
Ross isn’t taking sides. He said the exchanges should focus on innovation, rather than chase each other.
“Investors need exchanges to create innovative new solutions for the real problems of liquidity and price discovery, but all the NYSE, IEX and others want to do is tweak their models to go after each other,” he said.
- Mike Segar/Reuters
It’s unlikely IEX will start offering rebates to compete. IEX CEO, Brad Katsuyama, came down hard on rebates in late June during the House Financial Services Committee’s US Equity Market Structure hearing. Here’s Katsuyama (emphasis added):
In short, rebate practices cause clear and significant harm to investors. In addition, they are inextricably linked to much complex regulation that, although designed to serve the interests of investors, has had unintended consequences and could be reduced or eliminated if this conflict is removed.
Katsuyama thinks NYSE American fails to replicate IEX’s model because of the rebates it offers.
“NYSE American is nothing like IEX — paying an unprecedented rebate doubles down on their hypocrisy, and is a desperate distraction to protect how they really make money: selling speed advantages on their two main exchanges,” Katsuyama told Business Insider through a spokesperson.
The NYSE has been up front about planning to protect its territory. The NYSE president Tom Farley told Business Insider earlier this year that he thought the NYSE could implement the speed bump model at a more effective price than IEX and attract more liquidity, with IEX generally attracting so-called dark liquidity.
“We think we can improve on the existing speed-bump model because frankly, we can do it a lot cheaper for customers,” he added.
Asked if he could see why it might appear odd to go from aggressively fighting against the IEX speed-bump model to implementing one, he stressed that the NYSE would do whatever it took to have the best listings franchise. IEX has outlined plans to win listings.
“The way we operate our business is, we are going to do everything we can to have the best listings franchise, and we’re going to look at what competitors are doing, and whether they may or may not be competing for our listings business, and respond in a way that enables us to protect that,” Farley said.