Hmmmm, What’s Up Your Sleeve, Nasdaq?
Well, it looks like the Nasdaq PSX exchange didn’t quite work out. After years of sitting in the bottom of the market share pile (they were recently below 1% market share), Nasdaq has decided to scrap the PSX model. When it was originally launched, PSX tried using a model which gave priority to those orders which displayed greater size. On the surface, this was a unique approach to try and solve the shallow liquidity problem. But it was doomed to failure from the beginning since any order that had any meaningful size was quickly stepped ahead of by a more aggressive order. Nasdaq admitted their failure in this note :
“The uniqueness of the PSX pro-rata execution model among US equity exchanges limited adoption by some potential participants. Additionally, the pro-rata execution model found traction in only a sub-set of securities. PSX’s new price-time model will encourage broader participation and more robust quoting in the full range of NMS securities.”
Now Nasdaq is going to relaunch the PSX with a price-time model. You are probably thinking, “what’s so special about that – don’t all the other exchanges already use price-time priority”? Yes, they all do use price-time priority. Now you are probably thinking that Nasdaq must have another trick up their sleeve for the relaunch of PSX. And you would be correct.
What could it be? What will drive order flow to PSX? There is only one answer here: Rebates.
“PSX plans to establish itself as the pre-eminent destination for trading ETPs through a combination of meaningful economic incentives for participants and the establishment of programs designed to attract committed liquidity providers. These programs will be announced at a later date and will be subject to filing with the SEC.”
We can’t wait to see the new pricing details. We are pretty confident that some smart order routers are already being coded to take advantage of these new “economic incentives.”
Rather than relaunch the PSX, Nasdaq could have tried a much bolder move. They could have shut down the PSX and decreased the number of exchanges to 12. They could have shown some leadership to the market and did away with one of their pricing schemes. They could have tried to help aggregate liquidity rather than continuing to contribute to the problem of fragmented liquidity. But of course, we know, they are a public company and owe it to their shareholders to maximize profits. And that is exactly what is wrong with the for-profit exchange model.