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Nasdaq Launches Liquidity Flags to Boost SuperMontageVolume

In a strategy to broaden participation in SuperMontage, Nasdaq implemented liquidity flags to help professional traders track their profits and losses from liquidity rebates and access charges in real-time. It's all part of move to win back market share from ECNs.

In a move to help SuperMontage win back order flow from rival electronic-communications networks (ECNs), The Nasdaq Stock Market, Inc. introduced so-called liquidity flags. Liquidity flags are a computer-to-computer message interface that notifies traders in real-time whether or not they're earning liquidity rebates or paying out access fees.

"The corresponding rebate flag puts (Nasdaq) on a more equal footing with Island, Archipelago, Brut and Instinet, all of which had that same capability," says Michael Richter, chief executive officer of Lime Brokerage, a direct-access-brokerage-firm that uses SuperMontage and liquidity flags to serve hedge funds and professional investors.

According to a Nasdaq spokesman, this is part of a series of steps that Nasdaq is taking to capture market share in Supermontage, which accounts for 20 percent of Nasdaq's trading volume, as compared to Instinet/Island with 30 percent and Archipelago with 14 percent.

Liquidity flags were requested by broker/dealers -- which include quantitative-trading-shops, active traders and order-entry firms -- participating in a new program to enter limit orders on behalf of various investors into SuperMontage.

Under a 90-day-pilot-program approved by the Securities and Exchange Commission, nonmarket-making broker/dealers are allowed to have direct access to SuperMontage. For the first time, these brokerage firms can enter customer and proprietary limit orders from various investors into the system. They are doing this through the trading platform's "SIZE" Market Participant Identifier (MIPD), which went into effect on Feb. 10.

"We've increased the order flow (to SuperMontage) because of the implementation of SIZE," says Richter. SIZE is an anonymous quoting facility within SuperMontage. Previously, Lime could send orders to SuperMontage, they would execute but the customer would incur a fee. "But with the implementation of SIZE and their new policy on paying a rebate, there's an opportunity to attract order flow and therefore, it should increase liquidity on SuperMontage," he says.

The liquidity flag is important to Lime because when the agency-brokerage-firm calculates its commissions -- which it conveys in an execution report -- it passes through ECN charges and rebates as part of it, he says. "Since we are computing commissions on each transaction, we needed to know the status of that transaction, whether it was going to receive a rebate or incur a charge and we needed that piece of feedback in real time," he says.

In the Nasdaq market, traders earned rebates -- typically, 20 cents per 100 shares traded -- if they are liquidity providers and they pay access charges -- usually, 30 cents per 100 shares -- if they are liquidity takers.

"If I'm a day trader or an active trader, even if I do 10 trades an hour, I like to know was I a liquidity (taker) or was I a liquidity- provider because that is an important part of my personal P&L," explains Dean Furbush, executive vice president of Nasdaq Transaction Services.

According to Richter, the customers' model-based trading strategies factor in whether or not they will be paying a fee or earning a rebate because that can substantially impact their overall transaction cost. It could cut their transaction costs by up to 50 percent, he contends.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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