Commenting on this plan was Nasdaq President Richard G. Ketchum, who said, "We think this pricing plan will improve the market by encouraging participants to provide more liquidity, is more fair for market participants, and is expected to reduce overall trading costs by about 8 percent from pre-SuperSoes levels. The key benefit of the plan is that there will be an increased economic incentive for participants to provide liquidity - a feature that is good for investors and Nasdaq-listed companies."
The Success of SuperSoes is Driving the Pricing Plan
A key factor driving the pricing change is the successful implementation of SuperSoesSM in July. That system was a sea change in how market participants interact with Nasdaq to obtain quotes and execute trades. SuperSoes has made accessing liquidity more efficient, allowing participants to access large blocks of shares automatically in one order compared with the pre-SuperSoes environment, which required numerous trades to achieve the same result. SuperSoes can access several quotes with one order as well as access more size (up to 999,999 shares), whereas SelectNet® accessed one participant per order and the prior SOES share limit was 1,000 shares for automatic execution. Thus, SuperSoes has significantly reduced the number of orders for a given volume of activity
.Historically, Nasdaq charged fees to market participants based primarily on the number of trades executed. Today that model works less well, as the value of Nasdaq's services is much better represented by the number of shares than the number of trades. The new integrated pricing structure, which addresses these changes, is summarized as follows:
What is Being Done
The components of the pricing plan are being phased in over the period from October 1 to December 3. These components are detailed below:
First Phase (submitted to the SEC on September 28, for implementation on October 1)
- New SuperSoes Pricing: Includes an order-entry charge and a per-share execution charge.
- Updated SelectNet Pricing: Moves SelectNet prices to levels similar to the pre-SuperSoes period.
Second Phase (submitted to the SEC on October 3, for implementation on November 1)
- Updated SuperSoes Pricing: Will include an order-entry charge and a higher per-share execution charge in order to rebate members that provide liquidity through SuperSoes.
Third Phase (being submitted to the SEC on October 5, for implementation on December 3)
- Participation Pricing: Nasdaq will begin to differentiate prices in order to reward full participation in The Nasdaq Stock Market.
- Quote Update Fee: This nominal fee will address the capacity costs related to updating quotations on Nasdaq.
- Market Data Revenue Sharing: Nasdaq will begin to share with market participants a portion of the market data revenue earned through the dissemination of Last-Sale and Inside-Quote data.
The impact and rationale of each of these steps is discussed below:
New SuperSoes and SelectNet Pricing
Nasdaq's price package constitutes an approximate 8% cost reduction when compared to the pre-SuperSoes pricing model. The overall fees assessed for Nasdaq trading haven't changed significantly from the pre-SuperSoes environment; rather, the relative prices across the fee structure have been adjusted to bring revenue in for the appropriate reasons. Since trading in SuperSoes began in July 2001, Nasdaq quoting and trading revenue has declined by about 50 percent, holding volume constant. This "half-off sale" was due to a combination of Nasdaq price changes and participant trading behavior. Market maker usage of SelectNet dropped off dramatically as expected, and non-liability trading declined to only about 2% of all SelectNet usage. Furthermore, cancellations for both SelectNet and SOESSM/SuperSoes declined in an equally dramatic fashion. Fewer cancellations means more efficient trading and more efficient use of technology, but cancellations had also counted for more than 25% of Nasdaq's quoting and trading revenue. The revenue realized from our new pricing model is critical. It will ensure that Nasdaq is able to maintain the distributed trading infrastructure that has served us so well, including its massive redundancy, heightened security, and innovation.
Rebates To Liquidity Providers
At present, ECNs may charge fees for access to the liquidity displayed in their systems, but market makers are generally prohibited by the SEC from charging such fees. This discrepancy means that the landscape of the marketplace is uneven. The proposed pricing plan includes a liquidity-provider rebate to any market participant-whether market maker or ECN-that is accessed through SuperSoes and that does not charge an access fee associated with SuperSoes trading. This is an important step on behalf of market makers, which will result in a more balanced cost structure for all participants that provide liquidity to the marketplace.
Participation Pricing
Nasdaq will offer preferential prices for participants that participate fully in The Nasdaq Stock Market. Participation pricing is aimed to reduce the opportunity for participants to free-ride on Nasdaq's infrastructure, while transacting their value-added functions elsewhere.
Quote Update Fee
An additional goal of the pricing package is to make our capacity more accessible to market participants by discouraging unnecessary quote update and order entry. When a participant enters orders that have little or no chance of being filled, or when a participant updates its quotes excessively without trading, strain is occasionally placed on Nasdaq's systems, which can cause delays to other market participants without adding value to the market. Through order-entry and quote update fees, we will begin to address these issues economically, by better aligning a participant's system use with its charges.
Market Data Revenue Sharing
To further reward participants that fully participate in The Nasdaq Stock Market, Nasdaq will begin to share market data revenue. Although market data revenue is used to cover the regulatory and technology costs associated with the market, Nasdaq recognizes the value that participants add when printing their trades with Nasdaq, and has thus incorporated this sharing of revenue as an important feature of the new pricing plan.
Benefits of the New Pricing Plan
There are three primary benefits to the new pricing plan. They are:
- Increases liquidity. The new pricing structure encourages participants to provide a greater amount of liquidity, since the participants that provide liquidity that is accessed by a SuperSoes order will get a rebate. This is expected to encourage more depth to be shown, which is good for investors and for companies.
- Provides fairer treatment to all participants. Currently, some market participants charge fees to access their liquidity while others do not, making the landscape of the marketplace uneven. The proposed pricing plan provides a liquidity-provider rebate to members that do not charge an access fee. The result of that will be a more balanced, equal cost structure for all participants providing liquidity to the market.
- Reduces overall trading costs by about 8 percent from the pre-SuperSoes levels. This pricing plan reduces the cost structure for the industry when compared with the pre-SuperSoes pricing model. Four out of five market participants would see their costs stay the same or go down with the new pricing model, again in comparison to the pre-SuperSoes pricing model.
