Last month we wrote about a new order routing strategy from Nasdaq called SCAR and summarized it as:
“SCAR can be combined with all sorts or order types, and Times-In-Force. SCAR allows exchange members to seek liquidity on Nasdaq, and its sister exchanges (BX and PSX). Any unexecuted orders will rest on Nasdaq and not route out. It will not route to clear a locking exchange. It will therefore incur less take fees.”
We have since learned a little more about SCAR from a new Nasdaq filing which goes into detail on its pricing. Nasdaq’s objective appears to be to grow its market share by offering discounts to participants who use this routing strategy and normally do not qualify for their higher tier volume rates. According to Nasdaq, the SCAR fees are:
· SCAR orders executed on BX will be provided a credit of $0.0015 per share in Tape A and Tape C securities priced at $1 or more per share.
· SCAR orders executed on PSX will be assessed a charge of $0.0029 per share in all Tape securities priced at $1 or more per share.
These SCAR rates are better than the rates that a Nasdaq client, who doesn’t qualify for tier discounts, would receive if they did not route through SCAR. For example, a customer that falls into the lowest fee tier would normally pay $0.0003/share to execute an order on Nasdaq BX. If this same customer used the SCAR order routing strategy, Nasdaq would instead provide a credit of $0.0015/share for any liquidity taken from Nasdaq BX. If the SCAR orders routes to Nasdaq PSX from Nasdaq, then it would be charged $0.0029/share instead of $0.0030/share.
Parsing through the SCAR discounts is tedious and probably beyond the scope of this note. However, the point we are trying to make is that Nasdaq is using order routing strategies to attract clients who normally wouldn’t qualify for better tiered rates. Nasdaq claims:
“The proposed SCAR pricing is set at rates that make it more economical for members to use this routing strategy, especially for those members that do not already add and/or remove large amounts of volume on PSX and BX directly.”
We think that such discounts may create a burden on competition because trading participants might forego opportunities for better prices (more price improvement) on competing market venues. In other words, these lower cost order routing strategies could distort a brokers ability to obtain best execution because of economic conflicts of interests.
The major exchanges continue to tweak their access fee rates to try and attract orders to their exchange. SCAR is just another example of a routing strategy that might lower a brokers cost but potentially increase their clients cost because of missed opportunities.