The Benefits of Competition

The war for dominance in the exchange world is being fought on many fronts, and one lens through which to view each battle is the distinct yet inter-related revenue streams of the exchanges. Generally speaking, there are at least three types at a typical exchange: listings fees, transaction fees for trading and market data fees.

The battle for market data revenues is already evident in new product introductions by the NYSE and Nasdaq. Some developments such as real-time Open Book from the NYSE are probably best characterized as long-overdue moves to enhance transparency, or even catch up. But other recent announcements by Nasdaq and the NYSE make clear that market data is another area in which the two heavyweights are gearing up for battle. The good news is this fight will lead to innovation that will deliver potentially useful information to traders/investors to help them make more-informed decisions, tweak their algorithms and quantitative models to accept newly available inputs, and even come up with new strategies and trading opportunities.

What follows are some early observations on each of Nasdaq's and the NYSE's new data tools that we thought might be useful for the trading community.

Nasdaq Market Analytix on the Attack: A Couple of Direct Hits and a Couple of Misfires

Nasdaq just launched a new data package called NASDAQ Market Analytix (NASDAQ MAX). It includes four new products that we divide in two groups for simplicity: Market Velocity and Market Forces, along with Competitive VWAP Benchmarks and Competitive VWAP Leaders. With respect to the former group, Market Velocity provides a real-time view of the level of intensity in orders, excluding reserve orders, submitted to the trading system before it shows up in the price and volume information. The product captures the pre-trade (not to be confused with pre-open) activity in an issue to detect changes in direction, momentum or liquidity by adding up all order activity submitted to the trading system and compares the current level of pre-trade activity with the expected level of activity. Expected activity is expressed as a percentage relative to the last 21-day average quote and order activity during that time period. Market Forces supplements the offering by using the same information found in Market Velocity, but organizing it into buy and sell orders, providing a buy/sell ratio. An accurate, real-time indicator of buying/selling pressure in stocks is an invaluable tool to any trader and may provide an indication of market direction or momentum. In fact, these products should be useful for improving algorithmic trading strategies, in investment strategies that rely on such data in identifying trading opportunities, and simply in alerting trading desks of activity and unusual trading patterns in stocks in which they are interested. Moreover, since the velocity indicator simulates information that would be available in an NYSE trading crowd but is never displayed systemically and Nasdaq has never provided it at all, this is the first attempt we are aware of to give floor-type color to a fully electronic trading system, which we applaud.

Competitive VWAP Benchmark by Nasdaq provides the best and worst average price performances by traders in the Nasdaq Market Center. Competitive VWAP Leaders is a leader board available by daily FTP that ranks the firms trading a particular security by total share volume executed weighted by execution quality as measured versus VWAP. While some people may find this data interesting, the shortcomings are manifold. There is always danger in statistics, but in this case caution must be exercised and a critical lens cast on how Nasdaq is calculating them - one must not assume that they will be accurate or informative for broker evaluation. First, even though the ranking is weighted by performance, firms that might actually have the best performance could still find themselves excluded or ranked lower because of small trade size, which likely will disproportionately disadvantage small broker-dealers. Second, as in any benchmark analysis, it is an exercise of questionable value to rank a broker vis a vis one benchmark - VWAP in this instance - when it's client-specified benchmark and/or goal might have been different, say implementation shortfall (IS), or the size of its order may result in the broker becoming the VWAP. Third, certain participants might want to be more anonymous in their trading and use different or multiple identifiers (MPIDs) to avoid having their trades captured this way. Considering all of these shortcomings, our view is that while these VWAP-related products may be a good way for Nasdaq to take advantage of the industry's interest in transaction cost analysis and a good vehicle from which to offer advertising/marketing for their large broker-dealer customers, they are likely to be unintentionally misleading. Given our industry's love affair with benchmarks, this product may become popular anyway and with constructive feedback, could actually develop over time into a useful comparative tool. But at present we see little value. For a detailed description of these products and information on how to order them, click here.

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