Michael Blaugrund

Head of Equities, NYSE

Paul Kenyon

Head of Sales and Relationship Management, NYSE

Steven Poser

Director, Research, NYSE

Kevin Tyrrell

Head of Equities Strategy and Research, NYSE

NYSE is starting this forum to share data-driven insights from our trading systems and thoughts on key market structure topics. We welcome any and all feedback to

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July 10, 2018

Fee Pilot Round 2

Our previous post highlighted how end investors could potentially bear increased costs as a result of the SEC's proposed Transaction Fee Pilot. As we expected, the post triggered a significant amount of public debate, as well as discussion between the Exchange and members of the buy and sell-side. This is an important topic worthy of discussion.

This follow-up post provides additional detail of our original calculations. We have also prepared a sensitivity analysis highlighting that substantial costs would remain for investors even if our reasonable assumptions prove, in practice, to be either too aggressive or conservative. Finally, in the interest of inviting parties to reach their own conclusions, we have created an interactive model that enables readers to input their own assumptions related to venue and liquidity type distributions. By providing their own data, readers can see the resulting estimated impact.

Key Points of the Original Analysis

  • The original analysis considered the fee pilot's impact on liquidity-taking flow because:
    • Institutional and retail investors take liquidity more than they provide liquidity;
    • These investors generally pay fixed commissions and likely will not receive the benefit of lower exchange fees and, therefore, will bear the cost of wider spreads; and
    • Investors providing liquidity may benefit from the wider spread by (1) posting at less aggressive prices if they join the (now wider) NBBO, or (2) seizing opportunities to set a tighter NBBO with less competition from market makers. In either case, we anticipate these are relatively weak effects, and it’s important to note they are in conflict with one another.

  • We assume that a reduction in access fees would result in a corresponding reduction in rebates.

  • Rather than attempt to quantify the impact of the pilot for each bucket, we used a weighted average fee/rebate reduction based on the total number of stocks that would be impacted by the pilot.
    • This approach yields an average fee/rebate reduction of 8.2 mills across all stocks.
    • The fee/rebate reduction across just the 3,000 pilot securities will be substantially higher, but given that we do not know which securities will be included it is appropriate to apply the lower average reduction across the broader universe.

  • We then use this value to 1) estimate the change in spreads, and 2) estimate the additional cost borne by liquidity-taking flow.

  • We assume that the change in spreads applies market-wide, including to non-maker/taker venues on the basis that maker/taker exchanges drive the inside quote far more frequently than taker/maker or flat fee exchanges

  • The cost calculation measures the change in cost to take liquidity, using the midpoint of the spread as the benchmark price.
    • The calculation charges 100% of the higher spread cost to the (conservatively) estimated share of agency-taking volume.
      • Our assumptions in this scenario are as follows:
        • Agency Share (based on NYSE Arca taking volume) is 49%
        • Maker/Taker Venue Share is 52%
        • Market average daily volume ("ADV") is 7.2 billion shares; average notional value is $368.7 billion
        • Change in spread is 0.32bps
    • Principal taking volume is charged the higher spread cost, less the reduction in access fees.
      • Agency Cost:
        Change in Spread*1/2 * Market Notional Value * Agency Share
      • Principal Cost:
        [Change in Spread*1/2 * Market Notional Value * Principal Share] - [Fee Reduction * Market Volume * Principal Share * Maker/Taker Venue Share]

Sensitivity Analysis

  • Our volume assumption used a year-to-date ADV at the time of the analysis.

  • We tested the model by increasing and decreasing the volume figure by up to 20%.
    • This accommodates the observation that some market activity may not be directly impacted by wider spreads, such as auction volume and midpoint volume.

  • Decreasing the volume assumption by 20% results in a cost of ~$0.86 billion, compared to the ~$1.08 billion original estimate.

  • The impact estimate is more sensitive to spread changes than volume changes:
    • If we over-estimated the spread increase by 20%, our cost estimate would be $0.79 billion compared to the ~$1.08 billion original estimate.
    • Conversely, if spreads widen more than we anticipate, costs will increase.

  • While we feel that our agency share of volume was appropriately conservative, the impact estimate shows relatively little sensitivity to this metric.

Interactive Model

As noted in our introduction, we are providing a spreadsheet that enables users to input their own assumptions so they can arrive at an estimated annual impact from their firm's own data. The model includes a robust set of venue and liquidity action variables, enabling users to customize volume mixes for variables such as add/take, standard/inverted/dark venues, etc. We also include a Yes/No variable for cost-plus or pass-through pricing models. Many of the questions generated by our initial post related to volume and activity assumptions, and we expect that this model will enable readers to review their own activity distribution and see the resulting impact estimate.

Download the Interactive Model


We consider the substantial debate around our original post a welcome outcome. We achieved our goal of encouraging discussion of the possible impacts of the SEC's proposed Transaction Fee Pilot. We hope that future commentators will attempt to include substantive and quantifiable data in support of their stance, as we have tried to do here. We welcome feedback and continue to believe that the proposal will result in increased costs to investors due to wider spreads. We agree with the general view of many who have commented that no one can precisely predict the future and that several assumptions are required to model the possible results of the pilot. In our view, we believe that costs for end investors to take liquidity will rise.

May 25, 2018

Transaction Fee Pilot: An Impact Assessment

After much anticipation, the SEC has proposed a “Transaction Fee Pilot,” which would impose additional price controls on exchange access fees and rebates. As proposed, all equity exchanges (but not alternative trading systems (“ATS”) or other over-the-counter (“OTC”) trading venues) would be required to reduce access fees and/or reduce or eliminate rebates on 3,000 stocks for a period of up to two years. While some commentators equate a lower access fee with a better trade price, we have seen little analysis of the Proposal’s actual cost or benefit to investors. To fill this void, we are presenting two approaches that attempt to roughly quantify the Proposal’s potential impact on investors.

The analysis involves numerous assumptions, and we welcome any and all feedback. First, we assume that a reduction in access fees will result in a reduction in rebates. Second, we assume that with a lower rebate, spreads will widen.

The widening of spreads is generally accepted as a cost to investors because of the related increased transactions costs, particularly for agency liquidity-seeking order flow. Importantly, a wider spread will result in higher trading costs for this type of flow regardless of whether the order trades on an exchange or an off-exchange venue that derives prices from exchanges.

As demonstrated in the chart below, we find that as access fees decline, the cost to investors will increase by at least $1bn, increasing to nearly $4bn should such changes be applied to the entire market. While all investors would absorb the costs of wider spreads, the benefits from the proposed reduction in access fees would accrue primarily to sell-side brokers and proprietary traders

Top-Down Assessment of Fee Pilot Proposal

We first estimated costs using a top-down approach, which applies the proposed Fee Pilot changes to current average market-wide statistics. We assumed that rebates on trades in securities in each proposed Trade Groups would fall by the same amount as access fees would fall. For Group 3 (the “no-rebate” group) we assumed that market forces would reduce the access fee to $0.0002. We expect Group 3 to settle at a rate below Group 2’s $0.0005 cap as there is no rebate allowed on the other side of the trade; we also note that flat-fee venues which charge both sides of a trade today are generally priced between $0.0000 and $0.0003. As shown in the following table, this yields a blended access fee reduction of $0.00082 per share.

In order to find the expected new average spread, we identified the following calculation to apply the impact of the rebate reduction to consolidated spreads:

New Consolidated Spread = Current Consolidated Spread + Rebate Reduction * 2

The Current Consolidated Spread is the median market-wide bid-ask spread, and the Rebate Reduction is the $0.00082 blended average fee change. The Rebate Reduction is multiplied by 2 as we anticipate market makers will adjust both their bids and offers to account for the new pricing structure. This calculation results in a 1.1% increase in average spreads, to 28.1 basis points (bps).

As noted by the SEC in its proposal, brokers that are subject to exchange fees and rebates generally do not pass those costs/credits to their customer. We therefore assess principal and agency flow differently as principal flow is impacted by both explicit exchange fees and spread costs, while the ultimate customer behind an agency order incurs spread costs but usually does not pay explicit exchange fees. We also assume that the principal flow benefit from the fee reduction applies to maker/taker activity, but the higher spread cost applies to all principal and agency flow in the market.

Our cost to investors is found by calculating the cost to cross the new, wider spread; our cost to principal traders is found by calculating the cost to cross the new, wider spread netted against the benefit from lower access fees. Spread costs here are considered to be ½ the quoted spread for liquidity-taking flow, per standard transaction cost analysis measurement of performance against arrival price.

Our results show, on net, an estimated cost of $1.08bn to the industry, of which $721MM would be incurred by agency flow.

We believe that this result is somewhat conservative, primarily due to the assumptions of 1) no change in quote size despite the wider spread, 2) no shift in venue market share, and 3) applying the NYSE and NYSE Arca principal/agency ratio despite the fact that the market-wide agency taking share is much higher. This second assumption likely limits our estimated cost substantially, as a quick glance at major retail brokerage firms’ 606 reports indicates that nearly all held market orders are executed OTC. These conservative assumptions are offset by the exclusion of taker/maker (i.e., rebate to take and fee to add) venues’ impact on principal flow, the assumption that all agency flow does not pay explicit exchange fees, and by not assigning any benefit to liquidity-providing agency flow from a wider spread. We also assume a representative amount of volume in each of the pilot groups, which could be incorrect in either direction.

The below chart shows the distribution of the spread cost increase and the access fee decrease for the proposal’s three groups compared to the current market average. This again assumes an even distribution of liquidity characteristics across stocks. The access fee paid by brokers is small relative to spread costs in today’s world, and could fall as much as 93% for Group 3 stocks.

Bottom-Up Assessment of Rebate Elimination

We also estimated changes from eliminating rebates across the market as a whole. We used a “bottom-up” approach that looked at the difference in quoted spreads for each stock trading on Cboe EDGX Exchange, Inc. (“EDGX”, which is a maker-taker venue) and Cboe EDGA Exchange, Inc. (“EDGA,” which is a flat-fee venue). EDGA and EDGX are very similar in that neither is a listing market, and both operate on the same technology in the same location. Accordingly, any differences in spreads between the two markets could be due to the different pricing models available on each exchange.

In aggregate, the EDGA average spread is roughly twice that of EDGX, but there is substantial variation by symbol. To account for this variation, we applied the difference in spread to the current consolidated spread for each symbol, capped that difference to 25%, and then further limited the maximum spread difference to the ratio of the primary exchange spread to the EDGX spread (these limitations were to account for the variance between venues and the fact that we are modeling a world with narrower differences in exchange pricing). The chart below shows the differences in average quoted spread between these two venues, the primary market and the consolidated quote.

We believe that eliminating rebates would widen spreads, as demonstrated by EDGA’s wider spreads relative to EDGX. Accordingly, applying this wider spread to current trading activity of all NMS securities on all equity exchanges would result in an impact of roughly $3.8bn per year, once again born largely by agency liquidity-taking flow. We also checked this result by setting all stocks to group 3 in the first model; our result in that case was a similar $3.7bn impact.

To recap, we have used two different models to assess the impact of reduced fees and rebates on liquidity-seeking flow. We find a $1bn cost from the proposed Transaction Fee Pilot, rising to $3.8bn should such limitations be applied across the market. As stated, any such analysis requires numerous assumptions, and we encourage input from market participants on how we could further refine this assessment of investor cost.

- Kevin Tyrrell and Steven Poser

May 15, 2018

A New Era of Trading on NYSE: Now Trading All NMS Securities

On April 9, 2018, the New York Stock Exchange broke with 225 years of tradition and began trading stocks listed on other exchanges. By April 25th NYSE was trading more than 8,000 total names across the NMS universe - over 5,400 of which were listed on Tapes B (regional exchanges) and C (Nasdaq). By the beginning of May, NYSE had achieved an average market share of 0.75% in Tapes B & C trading.1

Participant Types & Usage

The NYSE market model for Tapes B & C is similar to the existing model for NYSE-listed securities. While Tapes B & C names do not benefit from a Designated Market Maker (DMM), the NYSE Floor Brokers and Supplemental Liquidity Providers (SLPs) continue to play key roles and together account for nearly 30% of liquidity provision.

Across all participants, activity is slightly more concentrated in active names compared to more-established venues. The top 100 most-active Tapes B&C names on NYSE account for about 61% of total volume compared to 56% at other maker/taker venues.

Source: NYSE TAQ and NYSE internal data. May 1 – May 4 2018

Liquidity Concentration Results from Market Characteristics

NYSE currently offers two benefits for passively trading Tape B and C securities: 1) a relatively thin limit order book while participants adapt their strategies for the venue, and 2) the parity execution model. Orders entered via a Floor Broker share a portion of incoming order flow, resulting in quicker fills than standard price-time priority venues. This means that orders can get filled quicker and incur less immediate reversion relative to other venues.

The chart below shows short-term price reversion statistics for resting orders filled at the full spread (i.e., buying on the bid or selling on the offer). NYSE outperforms all other maker/taker venues on both Tapes B and C, showing results similar to inverted and flat-fee venues.

Source: NYSE TAQ. April 25 – May 4 2018

Strong Quotes from the Start

The NYSE market model has also facilitated strong quoting performance in the new symbols right off the bat. The chart below shows NYSE’s time at the inside for the most-active Tape B & C names. The full symbol rollout was complete on April 25; starting the next day NYSE was at the inside in these names more often, on average, than individual taker/maker or flat fee venues.

Source: NYSE TAQ. Data reflect the 200 most-active stocks on Tapes B & C. April 25 – May 4 2018

Next Steps

We expect market quality statistics such as time and size at the inside to continue to improve as more participants adopt the venue into their strategies, which should drive increased market share. We are going to continue to track our performance in active names, particularly those with long queues, where the differentiated NYSE execution model can add value.

Adding Tapes B & C to NYSE is the latest step in the on-going NYSE Pillar migration, to be followed by the launch of NYSE National and the transition of Tape A trading on NYSE.

1Source: NYSE TAQ. May 1 – May 4 2018