NASDAQ OMX Europe
MTFs (ATS), and the road to competitive markets in US equities
Danish Securities Dealers Association: October 01, 2008
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
Total US Equity Market – July 2008
NYSE
15.9%
ARCX
18.1%
Other SROs
4.4%
Other TRFs
13.0%
NASDAQ TRF
18.4%
NASDAQ
30.3%
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
NASDAQ TRF
NASDAQ
ARCX
NYSE
Other SROs
Other TRFs
1987 – 2000: Seeds Of Change
• October 1987: Black Monday. Markets fall 20 % in one day.
- Investors are angered when phone calls to floor brokers and market makers are
unanswered, and orders are unfilled.
• August 1996: Market Maker Collusion
- The SEC imposes the largest fine in its history against market makers for price fixing, and
anti-competitive behavior.
- Order Handling Rules are created that require all investor limit orders to be included in the
market montage, including those from Automated Trading Systems (MTFs).
• December 1998: Regulation ATS (a regulatory catalyst simliar to MIFID)
- MTFs become regulated marketplaces. For the first time, MTFs are allowed to compete on
near equal footing with the incumbent exchanges.
- A competitive marketplace begins to rise, and MTFs distinguish themselves with superior:
pricing, tick sizes, technology, market structure, and service.
• 1999-2000: Decimalization
- Incumbent exchanges begin to change behavior based on the new competitive landscape.
- Tick sizes on NASDAQ and NYSE move from fractions (1/8), to (1/16), to decimals.
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
2000 – 2002: Rise Of The MTFs
• Instinet
- Is founded in 1969, and becomes the first, largest, and for a time, the
only upstairs electronic liquidity pool. Attracts a large community of
buy-side and sell-side traders.
• Archipelago
- Founded in 1997 with the support of E-Trade, Goldman Sachs, and
other broker/dealers. Distinguishes itself by routing to all MTFs and
primary markets.
• Island ECN
- Founded in 1997 by Datek (an early online broker). Focuses on fast
and simple order matching. Attracts day traders and the early
algorithmic trading strategies.
• Many Others
- BRUT ECN, Attain, Market XT, Redibook, Bloomberg Tradebook, Directedge, Light speed, TRAC, Elephant, etc.
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
2002 – 2005: MTF Consolidation
MTF
JANUARY 2002 Market Share In NASDAQ Securities1
Instinet
12 %
Island ECN
12 %
Archipelago
5%
Redibook
5%
• Island ECN surpasses Instinet as the largest MTF by market share. Instinet purchases
Island ECN, combines the two platforms, and rebrands itself INET.
• Archipelago purchases Redibook, combines the two platforms, and achieves double digit
market share in NASDAQ securities.
• INET becomes the largest marketplace for NASDAQ securities, with over 25% market
share. NASDAQ purchases INET. NASDAQ purchases BRUT ECN.
• Archipelago grows its market share in NASDAQ and NYSE securities. New York Stock
Exchange purchases Archipelago.
1Based
on Salomen Smith Barney report. Dollar Volume % Market
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
2006-Present: Regulation NMS and the race for NYSE
Market Share
• The SEC institutes Regulation NMS
- Broker/dealers are forced to comply with Best Execution policies
- Trading floors of the NYSE and AMEX are required to offer an electronic limit order book.
80%
70%
60%
50%
42.0%
40%
30%
26.9%
20%
17.4%
NYSE
10%
Electronic Volume
Internalized volume
0%
Jul-05
Jan-06
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Building Liquidity In The U.S.: Pricing, Technology, Market
Structure, Trade Support, and Routing
Percent of quoting at the Inside (NBBO) for NASDAQListed Securities
49.6%
48.9%
NASDAQ
ARCA
21.1%
20.9%
BID
July 2008
Source: NASDAQ, Securities Information Processor (SIP)
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
ASK
Evolution of Market Structure
• Price / Time priority
• Pricing (Maker : Rebated / Taker: Charged)
• Tick Sizes (how fine is fine enough?)
• Advanced Order Types
• Proximity Services
• Non Displayed Orders
• Routing
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
Growth In Message Traffic and Volume
ROUTING & SPECIAL
HANDLING
NASDAQ U.S. MATCHING ENGINE - MILESTONES
Orders
Date
Value
Orders Per
Second
Date
Value
Shares Traded
Date
Value Traded (USD)
Value
Date
Value
Total Messages
Date
Value
9/18/08
612,847,952
9/16/08
62,590
9/18/08
11,963,652,537
9/18/08
430,670,424,972
9/18/08
2,115,885,764
3/14/08
551,617,634
9/4/08
60,375
9/16/08
10,058,923,933
1/23/08
366,523,125,194
7/11/08
1,923,511,458
1/23/08
547,196,817
8/25/08
60,015
9/15/08
9,043,271,363
1/22/08
338,924,421,348
1/23/08
1,798,227,692
1/22/08
532,153,088
5/29/07
59,244
1/23/08
8,930,017,775
8/16/07
328,171,909,617
1/9/08
1,671,263,228
1/18/08
410,306,017
5/24/07
56,092
1/22/08
8,356,644,087
7/26/07
298,902,840,318
11/8/07
1,590,921,408
1/10/08
397,028,862
5/15/07
33,209
8/16/07
7,769,475,310
7/25/07
212,289,196,934
11/2/07
1,365,972,947
1/9/08
357,425,902
5/9/07
32,507
7/26/07
6,867,842,974
7/24/07
206,129,005,660
11/1/07
1,237,851,157
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
Growth Of Consolidators and Routers
NASDAQ Trader Website: Attributed Broker Volume
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.
NYSEtm Website: Attributed Broker Volume
Thank you!
Landis Olson
Director – Markets Development
+ 44 20 7065 8053 | [email protected]
Henning Kruse
Director – Sales and Customers
+ 45 33 77 0381 | [email protected]
© Copyright 2008, The NASDAQ OMX Group, Inc. All rights reserved.