NASDAQ OMX Europe has taken the lead by setting out the most aggressive pricing policy yet. By offering a .25 bps rebate for posting liquidity (maker) and a .25bps fee for removing liquidity (taker) – it looks like NASDAQ is getting ready for a war of attrition. It will be interesting to see how the other MTFs react. This comes not too long after the LSE introduced its own maker/taker pricing model.
Assuming a 50:50 split of makers and takers, the net fees are zero for NASDAQ OMX Europe, 0.1bps for Chi-X, 0.15bps for Equiduct, 0.2bps for Turquoise with BATS still to declare its hand.
Naturally the whole point of the post MiFID world was to reduce trading fees but who would have thought that the race to zero would have happened even before all the MTFs had fully launched. Despite the fact that some of the backers of these venues have deep pockets they are ignoring a basic rule of economics – that ultimately you get what you pay for. Rather than just keep cutting prices, perhaps MTFs should look to differentiate too.
If speed (low latency) really is a value proposition then shouldn’t those venues that claim to be fastest be able to charge more than the slower ones? Equally, venues that offer smart onward routing services should be able to charge a (small) premium too. In the same vein, those venues that can streamline the clearing and settlement process, provide value add information or even just make themselves the most convenient venue to connect to should be able to get market share without necessarily having to pay for it.
What we are seeing is all the venues trying to buy liquidity on the assumption that the European trading community is entirely homogonous and is only motivated by one thing. The reality is that the trading community is segmented into different sub communities (e.g. high velocity traders) and each will have their own specific requirements.
Whilst I fully accept that the fragmentation of liquidity will drive down execution costs I think the winners will be those MTFs that can best articulate their overall value proposition and build liquidity by appealing to different niches of the new trading landscape.