10 September 2010
President and COO
Rosenblatt Securities Inc.
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Rosenblatt’s Market Structure News Digest
Global Exchanges and Market Centers
CBSX Exchange to Pay Highest Rate for Stock Orders
The CBOE Stock Exchange is altering its fees to win market share in lower-priced equities from dark pools and bigger venues such as NYSE Euronext and Nasdaq OMX Group Inc., according to Chief Executive Officer David Harris.
Our Take: This is one of the most fascinating exchange-pricing moves in recent memory, so forgive us for devoting an unusually large slog of space to it. The new CBSX pricing has the potential to significantly shake up competition not only among exchanges, but also between exchanges and wholesale market makers like Knight Capital Group (KCG) and Citadel Securities. CBSX inverted the normal maker-taker scheme and is paying a 14 cents-per-100 shares rebate to takers of liquidity in a group of highly liquid, low-priced equities, including C, BAC, F and other high-volume names. That rebate is not only much higher than the payouts for market orders on taker-friendly exchanges like Nasdaq BX and Direct Edge’s EDGA, it’s also slightly higher than the 10 to 12 cents per 100 shares that wholesale market makers pay retail brokers for the same orders. Brokers generally seek the lowest fees possible for removing liquidity, but on low-priced stocks the incentive is greater, because per-share transaction charges make up a higher percentage of the overall value traded. Rebates raise the stakes even more. It’s still early days for the pilot, but CBSX’s market share has responded — it doubled, from 0.33% to 0.66% between July and August. In the 24 ticker symbols that were part of the first phase of the pilot, from its inception on August 16 through September 7, CBSX executed 3% of the consolidated volume. Between January 1 and August 15 its market share in those names was just 0.23%.