Ted Kaufman - United States Senator for Delaware

Nasdaq OMX to launch new platform

Source: Financial Times

By Jeremy Grant

September 20, 2010

Nasdaq OMX will launch a new US equities trading platform that aims to attract large orders that would normally go to so-called “dark pools”, in the latest sign of bourses battling competition from alternative trading systems.

Exchanges have been trying to find ways to stem the flow of liquidity to dark pools, which allow matching of orders anonymously, with prices made public only after deals are done.

High-frequency traders, who use computers to trade rapidly in and out of shares, derivatives and foreign exchange, have flocked to exchanges and alternative trading venues, driving down average trade sizes.

That has prompted many investors to turn to dark pools to get large orders carried out.

Nasdaq said the new platform, set to be launched on October 8, was a “direct response to some of the market developments this year”.

These developments have split the equity market between exchanges and other platforms that offer pre-trade price displays, a so-called “lit” model, and “dark pools” where prices are only revealed when trades are done.

Ted KAUFMAN, a US senator, said last month that this trend meant that “much of the deepest and most valuable order flow has retreated from the ‘lit’ public markets to dark trading venues”.

Eric Noll, Nasdaq OMX’s head of transaction services, told the Financial Times the company was troubled that the markets had “effectively bifurcated over time into one that’s used by end users”, such as asset managers, “and one that’s used by professionals [high-frequency and other traders]”.

Nasdaq’s new platform – known as PSX, for which it has regulatory approval – aims to attract traders wanting to carry out large orders by offering incentives for such orders to be posted.

Typically such incentives are offered to traders to post orders of any size, which has so far been attractive to high-frequency traders eager to get to the best prices as fast as possible. That is known as the “price-time” model of incentives. Mr Noll said the time had come to offer a “price-size” model, where traders wanting larger orders done could also get incentives.

“There is increasing competition among professionals . . . What we’re aiming to do with PSX is change the dynamics of market participation by incentivising size, and therefore the liquidity in securities, as opposed to having to access liquidity in dark pools,” said Mr Noll.

Kevin Cronin, director of global equity trading at Invesco, an asset manager, said: “In today’s markets ... the difficulty of trading large blocks of stock has increased due to challenges that have been created by developments within the US equity market structure. The new PSX price-size model provides an innovative solution to this challenge and comes at a crucial time.

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