4 Min Read
* Nasdaq OMX PSX filing details plan to bring back price-size priority
* Focus on exchange-traded products to be dropped -source
* Exchange's market share is below 1 percent
By John McCrank
NEW YORK, May 27 (Reuters) - Nasdaq OMX Group Inc plans to revamp the smallest of its three U.S. stock exchanges for the second time in about a year, placing the emphasis back on the size of incoming orders rather than when they are received, according to a regulatory filing.
The move is significant because it illustrates how smaller exchanges have been struggling to win market share as more trading moves to private off-exchange venues such as "dark pools," which are more lightly regulated than exchanges and can offer more trading options.
Nasdaq launched its PSX exchange in October 2010 using a "price-size priority pro-rata" structure, in which standing buy and sell orders at a given price were matched proportionally according to their size, regardless of when they were received. Most exchanges use price-time priority, ranking orders by price, and orders with the same price by the time they were entered.
In May of last year, with its market share stuck below 1 percent, PSX relaunched, scrapping its price-size structure in favor of price-time. It also rebranded itself as a market for exchange-traded funds (ETFs), exchange-traded notes (ETNs), and other such products, with incentives to encourage their trading.
The relaunch has not moved the needle in terms of market share. So far this month PSX, one of 11 U.S. stock exchanges, has half-a-percent of market volume. Two other exchanges with less than 1 percent market share - National Stock Exchange and CBOE Stock Exchange - have closed in the past couple of months.
Nasdaq now plans to adopt a system under which most if not all securities on PSX would trade using a price-size pro-rata model, though some may continue using price-time, according to a May 23 filing with the U.S. Securities and Exchange Commission.
A person with knowledge of the exchange's plans said the new structure would drop the focus on ETFs and ETNs.
Nasdaq said in the filing that the use of a model that "de-emphasizes the importance of speed would provide an additional trading option to market participants that may wish to seek alternatives to the prevailing market structure."
The debate around the fairness of the high-speed computer-driven markets was ratcheted up with the March 31 release of Michael Lewis' "Flash Boys: A Wall Street Revolt." The book said high-speed traders bilk billions from the financial system using ultra-fast telecommunications links, microwave towers and special access to exchanges to gain an edge over other traders.
Institutional traders typically execute large blocks of stock in private dark pools, where orders remain hidden until after they have been completed, and access is limited to certain market participants.
Refocusing PSX back on order size has the potential to encourage traders to display orders with greater size in the public markets in order to receive a larger share of executions, Nasdaq said in the filing.
Nasdaq obtained the exchange license for PSX when it bought the Philadelphia Stock Exchange in 2008. (Editing by Matthew Lewis)