July 28, 2010

Anshuman Jaswal, Ph.D.
Recent Execution Quality reports released by Celent for the NYSE and Nasdaq markets have found that the electronic order books (EOBs) such as BATS Exchange, Nasdaq Market Center (MC), NYSE Arca and Direct Edge’s EDGA & EDGX Exchanges are dominating both the markets in terms of percentage market share and performance, continuing an earlier trend.

NYSE: Barclays Specialists leads the NYSE in market share, with the EOBs such as BATS Exchange, Nasdaq MC, and EDGX having lower share than before. Hence, the upward trend in favor of EOBs has been moderated. This is a noteworthy change and shows that the specialists/ designated market makers (DMMs), such as Barclays Specialists, Goldman Sachs Exchange & Clearing and BofA Specialist, are also holding their own in the market. In NYSE, DMMs have obligations to maintain an orderly market, quote at the National Best Bid and Offer (NBBO) and facilitate price discovery during openings, closings and imbalances.

Exchange specialists/DMMs were found to have the fastest execution, except for small orders. Mainly continuing an earlier trend from 2008 and 2009, the exchange specialists/DMMs had the fastest execution across order sizes, with the exception of the small orders, where the EOBs were faster. The speed for larger orders is actually lower than for smaller orders. This is contrary to the trend for the market makers. Market makers have become slower in execution across all order sizes, especially for smaller orders. Execution times for specialists/DMMs do not show any obvious trend.

Market makers are the leading participants in terms of the percentage of trades which show price improvement. The specialists/DMMs are the weakest market center type. However, the performance of all the three types of market centers has improved since 2009. Furthermore, the share of price disimprovement has also gone down across the categories. In addition to being the best in terms of price improvement, the market makers have also improved the most. EOBs have also seen their price improvement frequency go up by 5 percent. As a result, we find that the market is benefiting as a whole from the improvement in pricing.