* Nasdaq OMX PSX filing details plan to bring back
* Focus on exchange-traded products to be dropped -source
* Exchange's market share is below 1 percent
By John McCrank
NEW YORK, May 27 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
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)