NYSE Gives Floor a Credit to Provide Liquidity
March 17, 2008
The NYSE Hybrid Market has begun offering floor brokers a credit for providing liquidity, a signal that it is inching closer to the maker-taker fee model prevalent among execution venues. However, the credit--NYSE's first for the floor--is unlikely to draw new liquidity.
The proposal to institute a $0.0004 per-share credit to the floor was published in the Federal Register on March 5, though it was filed with the Securities and Exchange Commission on Feb. 28, the date it became effective. Comments are due by March 26, and the SEC has until May 4 to decide whether to rescind the policy.
Floor brokers executing trades for non-member firms receive the rebate, while NYSE member firms using floor agents are the recipients, said an NYSE spokesperson, adding, "In either case, it's incentive to post liquidity."
The New York Stock Exchange charged members $0.008 per share to remove and provide liquidity until Oct. 1, when it eliminated the fee for liquidity providers.
"I think what they're doing is ratcheting up the rebate, a little here and little there, to see what they have to give those guys providing liquidity," said Larry Tabb, founder and CEO of New York-based Tabb Group, adding, "They really don't want to move into a full rebate model."
The all-electronic NYSE Arca already provides a "full" rebate, charging members who execute a daily average of 30 million shares $0.0025 to take liquidity and rebating providers $0.0024. Most of the other electronic exchanges and electronic communications networks provide similarly high rebates--some are even higher and for any volume level. The liquidity providers attracted to the higher rebates are typically electronic trading firms using sophisticated order-routing systems and algorithms to pursue statistical arbitration-type strategies.
Those systems, operating on extremely tight margins, send orders to venues offering best price with the most attractive rebate. However, noted Richard Rosenblatt, CEO of New York-based agency brokerage Rosenblatt Securities, automated strategies cannot be carried out via floor brokers using handheld devices. Consequently, the new rebate is unlikely to increase the volume of orders brokers post.
Rosenblatt said he believes the credit confirms that NYSE management views the floor as a critical business component. "This is an indication the exchange actually believes its rhetoric, because it's putting extra money in agents' pockets at a time when they sorely need it," he said, adding, "It backs up their repeated comments that they want agents on the floor creating unique value for customers."
Less than half the size it was a few years ago, the NYSE floor remains the largest pool of liquidity, and floor broker and specialist customers pay a premium for access. The credit is a tiny--if welcomed--fraction of the fees floor participants typically receive.
"We were not getting anything previously, so to be getting something, regardless of how small, will be a help," said Doreen Mogavero, president and CEO of floor brokerage Mogavero Lee & Co. She added that it puts floor brokers on a more level playing field with competitors.
Depending on their business model, the new credit benefits floor brokers to varying degrees. Those providing direct access to the floor for buy-side customers usually are paid commissions in the range of $0.01 to $0.03 a share, while those servicing large Wall Street clients may be paid as little as $0.003--and those servicing NYSE members will see the credit go to customers.
