NASDAQ’s Experimental Price Pilot Update (The Prisoner Dilemma)


Beginning this past February 2nd 2015 NASDAQ began a courageous experiment in a subset of stocks listed both on its own exchange, as well as NYSE, in which it altered its pricing scheme to reflect a substantially lower access fee and rebate structure. NASDAQ acted unilaterally, without the cooperation of any other exchange family, and they were trying to test whether higher access fees were discouraging the use of public markets. NASDAQ deserves a huge pat on the back by the entire industry for taking this initiative in an effort to understand what drives participant behavior on public markets.

We wrote to you about their pilot here the day it commenced. Essentially, NASDAQ lowered its take fee to 5 mils, and lowered its rebate fee to 4 mils. In the first week, we noted in a note to you that NASDAQ market share in some stocks dropped, but went up in others. Bloomberg published an update after two weeks, and they also confirmed that NASDAQ’s market share was on the whole declining. Gary Stone also appropriately asked in that note why other exchanges have not also attempted such a pilot, and he asserts that the SEC created a Prisoner’s Dilemma with Reg NMS.

Five weeks have now come and gone. Institutional broker routers have had more time to adjust and program, and of course high speed liquidity providers have done the same (probably the night before February 2nd).  NASDAQ has released its own findings on its courageous experiment here. Essentially, NASDAQ highlights the following:


–          NASDAQ market share in the pilot names declined 2.9% – but actually let’s call it 2%, since NASDAQ’s market share in control stocks dropped .9%.

–          NASDAQ’s time at the NBBO declined from 93% to 88%.

–          There is no statistically important change in NASDAQ’s displayed size.

–          NASDAQ’s top liquidity providers traded significantly less on NASDAQ in these experiment stocks. They were 45% of the liquidity in January and 28% of the liquidity in February.

–          However, liquidity takers softened that blow. The lower 5 mil take rate made NASDAQ more attractive to take liquidity on, versus many other exchanges, as well as dark pools.


Yes, NASDAQ lost market share to other high rebate venues, like NYSE-ARCA and BATS-Direct Edge. But they also gained market share away from inverted venues, and from ATSs! The takeaway is that NASDAQ lost ELP participation, but gained “investor participation.”

This was NASDAQ’s first update on its experiment. They have stated that in future updates they will address the impact on arguably more important metrics – fill rate for active and passive orders, price impact, and the general quality of the public quote. Those are much more important metrics to institutional traders to be sure!

NASDAQ displayed dramatic leadership by conducting this pilot. It is clear to us that their behavior is consistent with the actions of a concerned and committed market participant. In our opinion, the SEC should take a leadership role, and order this experiment market-wide for all of the exchanges. If the SEC did that, then we really would have a truly important set of data with which we could all assess modern market quality, in an attempt to improve public markets. If there were a market-wide pilot, we would really be able to make assessments of those market quality metrics that NASDAQ still is intending to provide in future updates of its unilateral experiment.

Bravo NASDAQ. We often write about leadership in today’s modern markets, and specifically the lack of it thereof. With this experiment you have indeed demonstrated marked leadership that we hope all key market participants should exhibit.

We will update you as more detail of NASDAQ’s experiment becomes available.