On Friday, we wrote how we thought two new NASDAQ enhanced rebate programs were possibly responsible for the spike in quote traffic on November 1st (see Nanex chart above). According to Advanced Trading , NASDAQ has responded to our theory and have claimed they did nothing wrong:
Nasdaq rebuts these charges.”QMM is specifically designed for market makers to enhance price discovery across a wide spectrum of stocks by providing both incentives and obligations such as the requirement to quote in 1,000 securities which must be on the NBBO 25% of the trading day,” spokesman said in an email.
“To qualify for the program, member firms must also abide by the excessive messaging policy in place only at NASDAQ and of course market maker rules prohibiting quote stuffing.”
As for the message volumes, the spokesman said the impact of the additional quote traffic has been modest. “As our systems are designed to handle message volumes with minimal throughput degradation, we’re seeing member firms submit marketable orders in active securities and we’ve received feedback that the impact of additional quote traffic at the NBBO is modest as member firms have also already prepared to handle any active periods of messaging volumes,” the spokesman wrote.
In the statement that NASDAQ gave to Advanced Trading, they are defending their QMM program BUT they say nothing about the new NBBO Setter Pricing program. This program gives an additional rebate of at least $0.0002/share to members that are first to set the NBBO or the Nasdaq BBO. But the program does NOT have requirements or additional obligations:
NASDAQ will begin providing additional rebates to firms upon execution for displayed orders that are the first to set a new level of the National Best Bid or Offer (NBBO), or that bring the NASDAQ Best Bid or Offer (QBBO) to the NBBO. These orders will need to be displayed for at least a round lot at the time of execution to receive the rebate. These “Setter Shares” will earn a rebate of at least $0.0002 per share in addition to standard rebates for stocks above $1.
As for NASDAQ’s defense that the message volume was modest, this is questionable. Just look at the chart below that Nanex produced of KeyCorp. Maybe Nasdaq defines “modest” as having one stock quote 50% of all quotes in the stock market for a 5 minute period?