The battle between Nasdaq and the NYSE is not your traditional price war, which usually is characterized by lower fees. While the NYSE had hoped to add a small per-share charge to every execution and eliminate all specialist billing, discussions with the specialists broke down and the NYSE was left with a per-share fee in addition to a specialist charge. Further, the NYSE raised its fee cap and closed a loophole that had allowed Nasdaq to trade for free. Also, the NYSE raised its per-share fee and charges its clients for resting limit orders, while Nasdaq does not. The end result has been increased prices to trade. Mark Madoff is the Codirector of Trading at Bernard L. Madoff Investment Securities. He is responsible for managing the market-making operation, and oversees risk management systems and trading compliance.
Question: How will a price war between the NYSE and Nasdaq change order flow, and how will it impact regional exchanges and ECNs?
Nasdaq has ported the model it uses for Nasdaq-listed securities to Big Board names. It charges those who take liquidity while offering a credit to those who provide it. The NYSE charges a per-share fee on all orders, in addition to a specialist fee for resting limits. Nasdaq is hoping that its pricing will provide an incentive for firms to move their resting limits from a venue that charges to a venue that pays, thus minimizing the overall expense to trade.
When you couple the above with the order protection rule (part of Reg NMS), the newer venues are offering a competitive package. The NYSE has commented that limit orders posted in a marketplace that has the largest concentration of volume is optimal. While true, in a decimal environment with trade-through protection, the argument is far less powerful. And it's not unlikely that firms will test this concept by shifting order flow away from the NYSE.
Fearing movement from a monopoly (NTSE) to a duopoly (NYSE and Nasdaq), many firms have entered into relationships with ECNs and regional stock exchanges. If all orders are now "created equal," then why not invest in other market participants that offer even better pricing and superior technology? In addition, firms like the concept of having greater control over how their orders are handled.
Ultimately, we will move from a monopolistic environment to a more competitive landscape. And the end result of the price war will greatly outweigh any temporary uptick in prices. --Mark Madoff