Financial Regulatory Forum

US stock exchanges push for sub-penny pricing

By Reuters Staff
January 26, 2010

By Jonathan Spicer

NEW YORK, Jan 26 (Reuters) – The major U.S. exchanges are considering asking regulators to allow price quotes in increments as small as one-tenth of a cent for some stocks, a move that could revamp trading fees and the flow of orders in capital markets.

NYSE Euronext, Nasdaq OMX, privately held

BATS Global Markets and alternative venue Direct Edge, which plans to become a formal exchange operator this year, said the most heavily traded stocks could be priced more efficiently if they had narrower increments, or “tick sizes.”

Any narrowing of the ticks would likely involve only a subset of securities, possibly those stocks worth less than $5 or $10, some exchanges said. The current penny increment could be narrowed to a half-penny or as much as a tenth of a penny.

Nasdaq, BATS and Direct Edge executives told Reuters they would also consider increasing the tick sizes for thinly traded stocks if that would help them to trade more freely.

The venues added there is no formal coordination to push for changes as the U.S. Securities and Exchange Commission conducts a broad review of the mostly electronic U.S. markets.

“At this point, the review of the minimum trading increment has to be part of that dialogue,” said William O’Brien, chief executive at Direct Edge. “These issues are inexorably linked to one another from a market structure perspective.”

Brian Hyndman, senior vice president of transaction

services at Nasdaq OMX, said the company is speaking to traders to help decide what tick sizes on which stocks would be appropriate if changes were adopted, adding it is not yet pushing for lower increments.

Faster and more sophisticated trading of stocks and

exchange-traded funds (ETFs) over the last decade has forced exchanges to battle hard for the growing flow of orders.

Trading volume has increasingly migrated to so-called dark pools — where orders are matched internally and anonymously, and sometimes at smaller increments. Any narrowing of tick sizes would likely boost overall volume, which drives revenue, and redirect some of it back to the exchanges.

“Exchanges see themselves losing market share to dark pools and internalizers who are able to offer better pricing via sub-penny spreads, and they want a level playing field,” said Patrick O’Shaughnessy, exchange analyst at Raymond James.

“They are probably agnostic whether that means making

off-exchange venues having to honor penny spreads versus giving the exchanges themselves the ability to trade at sub-penny spreads.”

The SEC has said it is concerned the growth of dark pools and so-called internalization at broker-dealers harms public pricing on the transparent markets.

The regulator issued a paper on market structure and

high-frequency trading earlier this month, and is seeking

public comments on a series of questions, including whether it should “consider reducing the minimum pricing increment … for lower priced stocks?”

“BATS is a proponent of finer quoting increments and we were glad to see it in the (SEC’s) concept release,” said Chris Isaacson, chief operating officer at the exchange, which has about 10 percent of U.S. equity market share. “We think the increase in efficiency would probably increase volumes.”

Nasdaq OMX, BATS and Direct Edge said a broad group of customers would back changes to the tick sizes, adding they are considering proposing new increments when they submit comments to the SEC.

A NYSE Euronext spokesman said the New York Stock Exchange parent is considering tick size changes to a subset of equities, but that there is no formal proposal at present.

Trading fees, the competition for order flow between

exchanges and dark pools, and brokers’ ability to stand between clients and the marketplace are among the issues tied to price increments, Direct Edge’s O’Brien said.

“You can’t just pull one string from the sweater and be surprised when there are other ramifications,” he said, adding it remains to be seen whether markets now do not efficiently price high-volume stocks such as Citigroup Inc.

The pricing of equity quotes in pennies began in 2001, a move known as decimalization, which replaced quoting in eighths of a dollar. Stocks worth less than $1 are now quoted in sub-penny increments on the exchanges.

(Additional reporting by Sakthi Prasad in Bangalore; editing

by Matthew Lewis and Andre Grenon)

((jonathan.spicer@thomsonreuters.com +1-646-223-6253; Reuters Messaging: Jonathan.spicer.reuters.com@reuters.net))

Jan 26 (Reuters) – Major U.S. stock exchanges are pressing the regulator to allow price quotes in increments as small as one-tenth of a cent, as a way to encourage electronic traders to continue trading through them, the Wall Street Journal said.

Stock exchanges including NYSE Euronext and Nasdaq OMX Group Inc said the initiative to revamp the stock quote would induce electronic traders to trade through their platforms, instead of opting for private trading venues known as “dark pools,” the paper said.

Dark pools are high-frequency trading platforms where buyers and sellers can anonymously match large blocks of stock, keeping details of the deals and prices concealed to prevent distorting prices in the broader market.

“We have had institutions, hedge funds, a broad variety of customers asking for this,” Brian Hyndman, senior vice president of transaction services for Nasdaq OMX Group, told the paper.

On Jan. 13, U.S. securities regulators took their first stab at deciding whether rules are needed to curb high-frequency traders, whose lightning-fast computer programs now dominate equities markets.

(Reporting by Sakthi Prasad in Bangalore ) ((sakthi.prasad@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800))

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