Beginning today, Nasdaq will begin an experimental pricing schedule which will lower access fees from $0.0030/share to $0.0005 per share in 14 stocks (rebates will also be lowered to below $0.0005/share).  While this may seem like a relatively small program, we think the implications from this program are huge.  Today will mark the first time since the 2007 implementation of Reg NMS where one of the primary exchanges has voluntarily lowered their access fees. Here are a few questions and answers that we had about the program:

Is Nasdaq the only exchange implementing an experimental pricing schedule today?

Yes. Nasdaq is acting unilaterally without the cooperation of the other stock exchanges.  We are disappointed that the other stock exchanges didn’t join Nasdaq and would have preferred if the exchanges coordinated with each other and all lowered their access fees in the 14 securities today.  This would have reduced the transaction fee arbitrage that we will likely see with this unilateral action.  Nevertheless, we’re glad to see Nasdaq take this step on their own and hope the next step is a more coordinated experimental pricing schedule.  Nasdaq should be commended for moving the market structure debate forward with this data driven program.

Why is Nasdaq doing this?

In their SEC filing, Nasdaq said:

“In response to claims that public markets are too expensive, NASDAQ will modify NASDAQ Rule 7018(a) to lower execution fees for a select group of securities where access fees may be discouraging the use of public markets.“

We’re proud to say that we were one of the first outspoken critics of exchange pricing schedules (specifically, the maker/taker program) and are happy to see at least one exchange finally acknowledge the chorus of voices that have since called for a change.

How will broker algos react to this new Nasdaq pricing schedule for the 14 test securities?

We’re not sure but we don’t believe access fees and rebates should distort a brokers duty of best execution.  Orders should be placed on venues that have the highest likelihood of success regardless of the rebate.  We recommend that if you are trading in one of these 14 securities that you keep a close eye on any behavioral changes in your algorithms.  For example, if  Nasdaq is normally X% of your fills from posted liquidity, check to see if the fill ratio has dropped.  If so, it is possible that your broker has decided to forego the lower Nasdaq rebate and instead is sending more of your flow to higher rebate exchanges.

We believe that Nasdaq should not be penalized for taking this bold step and your broker should continue posting to Nasdaq even if that means they will be getting less of a rebate from your orders.

Is Nasdaq trying to steal market share away from off-exchange venues?

Yes, and they have a good reason for it in their filing:

“Off-exchange orders do not generate quotes on public markets, do not interact with orders on public markets and consequently do not promote or contribute to price discovery to the same extent as do orders posted and executed on exchanges. ​ Economic studies from markets spanning the world conclude that as more orders migrate away from exchanges, the price discovery process weakens, trading spreads widen, and overall investor trading costs increase…NASDAQ believes that proposed changes may improve price discovery in the select securities.”

We agree with Nasdaq and believe that more aggregation of liquidity pools will make for deeper and more stable markets.

How were the 14 securities in the experimental program selected?

It will come as no surprise that Nasdaq looked for securities that had an unusually high percentage of off-exchange market share:

“Accordingly, NASDAQ is proposing to reduce the access fee significantly in certain securities that have greater than average off-exchange transactions, which it believes may attract order flow that is currently directed to off- exchange trading venues…NASDAQ’s goal in doing so is to attract liquidity to NASDAQ in these securities, thereby improving the level of price discovery.” ​

Will Nasdaq end up losing market share in these 14 securities?

We don’t know but we’re happy to have the market be the final judge of that question.

What are the 14 securities in the program and how long will it last?

Nasdaq-Listed                NYSE-Listed

AAL                                  BAC

MU                                    GE

FEYE                                KMI

GPRO                               RAD

GRPN                               RIG

SIRI                                   S

ZNGA                               TWTR

Even though Nasdaq intends to make public the results of the program, we recommend that you cut this list out and paste it on your terminal to keep an extra eye on these names.  The program is scheduled to last no less than 4 months.