Rebates vs. liquidity - where do your priorities lie?
The recent increase in BATS Europe’s share trading in stocks listed on NYSE Euronext’s European exchanges goes some way to proving that pricing structures play a big role in the battle for business between Europe’s trading venues.
Furthermore, the rise in the multilateral trading facility’s (MTF) market share suggests that rebates have a significant influence on smart order routing logic, which may not be to the benefit of the buy-side.
From 1 June, BATS introduced an inverted pricing scheme for Euronext securities in Belgium, France and the Netherlands. From this date, traders received an increased rebate of 0.50 basis points, up from 0.20 bps, for posting liquidity with BATS in blue-chip stocks and exchange-traded funds listed on these markets. The 0.30 bps rate for removing liquidity remained.
The promotion has had a telling impact on BATS’ market share of these indices. According to BATS’ own data, the MTF’s market share in French CAC 40 stocks reached a record 7.19% on 11 June, up from 2.84% on 29 May. On 3 June, BATS achieved highs of 5.37% in the Belgian BEL 20 and 4.60% of the Dutch AEX, up from 1.34% and 2.54% respectively on 29 May.
A smart order router (SOR) that aggressively grabs liquidity from a range of displayed liquidity pools may consider explicit trading costs if all other factors such as stock price and depth of liquidity are equal across venues. Buy-side firms however, will not want their brokers’ SORs to be too heavily biased toward chasing attractive rebates, especially if these savings are not being passed back to them or, more importantly, they miss out on scarce liquidity elsewhere as a result.
Evidently, rebates attract liquidity – particularly high-frequency business from stat-arb traders – and liquidity will attract yet more liquidity. As this cycle continues, it can be difficult for the buy-side to distinguish whether their brokers are routing to venues to capitalise on rebates or because of an increase in available liquidity. Nor may they care if they are happy with their fills.
But with so many trading venues offering different and frequently changing value propositions, buy-side traders should continually probe their brokers for more detail on how their orders are being handled. By asking the sell-side for more granular post-trade reporting that breaks down executions by venue, the buy-side can get a sense of whether rebates have more influence over routing logic than liquidity or stock price.
In many cases, buy-side traders have found brokers reluctant to discuss their SOR’s logic and suspicions remain that some brokers are looking to recoup their technology investment via the MTFs’ rebate structures.
Clearly, the main winners of rebate-based pricing are the trading venues themselves. Buy-side traders may not expect to see execution cost savings passed back down to them, while the sell-side may feel vindicated in routing orders based on rebates and keeping these savings to themselves given the steep decline of commission costs. If venues can build on rising volumes, their price promotions become self-perpetuating and any potential tensions between rebates and liquidity dissipate.
But until then, there is every reason for buy-side traders to monitor with interest the waxing and waning fortunes of Europe’s trading venues.
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