‘Inverted’ Model Said to Be Considered for NYSE’s Newest Exchange
Such exchanges flip the standard fee model of U.S. equities trading
The New York Stock Exchange is considering a time-honored move to boost market share: copy an innovation from competitors.
NYSE has approached market participants about launching a so-called “inverted” exchange, a move that would borrow from the playbook of rivals Nasdaq Inc. and Bats Global Markets Inc., people familiar with the situation said.
Inverted or “taker-maker” exchanges flip the standard fee model of U.S. equities trading on its head.
Most U.S. exchanges collect a “taker” fee for each incoming trade that immediately executes against a standing buy or sell order posted on the exchange, removing it from the exchange’s order book. Meanwhile, the exchange pays a “maker” rebate to the firms that posted those orders in the first place. The idea of the model, called “maker-taker,” is to encourage firms to quote more competitive prices for the securities traded on the exchange.
In contrast, an inverted exchange pays rebates for incoming trades that execute against standing orders, while charging the firms that posted those orders -- the opposite of maker-taker.
For instance, if an investor decides to buy 100 shares of General Electric Co. at the lowest price being quoted in markets, his or her broker could route that order to NYSE’s flagship exchange, which has maker-taker pricing. NYSE would charge the broker about 30 cents. Meanwhile, the GE seller on the other side of the trade—oftentimes an electronic trading firm that continually posts buy and sell orders, a “market-maker”—would collect a rebate of around 22 cents from NYSE.
Alternatively, the broker could send the investor’s order to Bats’ BYX exchange, an inverted venue. There, BYX would pay the broker a rebate of 10 cents for the order, while charging the market-maker a fee of 18 cents.
Of the dozen U.S. exchanges currently in operation, Bats’s BYX and EDGA and Nasdaq’s BX are inverted. Together they had 9.2% of U.S. equities trading volume in January, according to data from brokerage Rosenblatt Securities Inc.
Adding an inverted venue could help 224-year-old NYSE capture some trades that are now flowing to younger players in the hypercompetitive U.S. stock-exchange landscape.
NYSE is said to be considering applying the taker-maker model to the former National Stock Exchange, or NSX, the most recent addition to its collection of four equities exchanges. NYSE’s three other stock exchanges use maker-taker pricing.
Intercontinental Exchange Inc., the parent company of NYSE, agreed to buy NSX in December. NYSE has renamed the exchange “NYSE National” and halted its operations in preparation for a reboot. It hasn't yet announced its plans for NYSE National.
“NYSE will engage with NSX members, buy-side participants and retail brokerage firms before finalizing operational plans for the exchange’s relaunch,” NYSE said in a Jan. 31 press release.
Inverted exchanges tend to be smaller than standard maker-taker exchanges, but they can be attractive to brokers who handle trades for institutional or retail investors. Such customers will often decide to buy or sell shares at the best price displayed in the markets rather than waiting for the price to improve. When investors submit such orders, brokers typically send them to inverted exchanges first, in hopes of capturing a rebate, before routing them to maker-taker exchanges that would charge the broker a fee, market experts say.
That has led some critics to complain that inverted exchanges skew brokers’ incentives so they don’t always send trades to the venue that offers the best result for the customer.
“You’ve got this hidden piping system in which brokers are able to take revenue out of orders that the customer doesn’t know about,” said Larry Harris, a finance professor at the University of Southern California’s Marshall School of Business.
Others say big exchange groups are simply offering customers a variety of pricing schemes, and that the emergence of a complex, fragmented marketplace with maker-taker and taker-maker exchanges is the result of regulation.
While the maker-taker model dates back to the late 1990s, its inverted cousin is a more recent development. Nasdaq introduced the first taker-maker pricing scheme on an equities exchange in 2009, and Bats followed suit in 2010.
The Big Board has shown a willingness to borrow ideas from competitors before. In January it said it would add a 350-microsecond “speed bump,” a feature that imposes a delay on orders, to another one of its smaller exchanges. The speed bump was pioneered by IEX Group Inc., the upstart exchange made famous by Michael Lewis’ 2014 book “Flash Boys.”