The strategy is designed to attract brokers who are handling retail order flow as well as algorithmic order flow. “We think we’re actually paying more than internalizers are paying for retail order flow,” related Harris. “If I’m a broker an I’m trying to execute a customer order, I’m going to care very much about the cost of the execution of that order,” said Harris.
Harris said the new rebate strategy is also attracting high frequency traders, since they can also be liquidity takers. “We’re attracting those (firms) because the take rate is attractive to them.” Other HFT firms are liquidity providing only and they are attracted to the model because they get to interact with the (taker) order flow first, said Harris, noting that the CBSX is attracting diverse pools.
So far, the new pricing strategy is paying off. On Aug. 20th, CBSX had a record day, on which more than 90.8 million shares changed hands, topping the previous daily record of 63.7 million shares traded on Aug. 12, 2010. However, Harris said the record volume was not entirely due to the inverted rebate strategy.
“We have a diversified business where we get order flow from option-related trading and we have traditional higher rebates in all other stocks,” he said. CBSX offers trading in more than 7,700 equities and exchange traded funds (ETFs), and is not entirely relying on the new inverted rebate strategy to drive volume on its exchange.
Traditionally, CBSX has paid higher rebates in all the other stocks – it pays a rebate of 25 (cents per 100 shares) to liquidity providers and charges 30 (cents per 100 shares) to the taker. Also, CBSX pays the highest rebates in sub-dollar securities, noted Harris. “The high volume days were the result of our other businesses,” said Harris.
While U.S. stock exchanges often change their “maker-taker” pricing strategies to incentivize liquidity providers and liquidity takers, Harris claims the CBSX did not create this inverted pricing strategy in reaction to what other exchanges are doing. “It’s more from feedback from our customers and kind of a willingness to take a little bit of risk that the order routers on a stock-by-stock basis would be able to distinguish between different fee structures,” he said.
“We’re up on peoples’ routing tables and they’re getting access to orders on a first in line basis,” he said. But it’s going to take some time for order routers to change their routing tables, said Harris. Order routing systems, including proprietary routers developed by brokers and commercial grade systems, can distinguish the “make or taker fees” on a stock-by-stock basis, said Harris. “We have been pleasantly surprised with the amount of volume they sent. I think as other firms change their routers for this type of structure, we’re going to continue to see growth,” predicted Harris.