How many US stock exchanges are there? Those guessing two, or even three or four, are way off. The answer is 10. By the end of this year it should be at least 13. The NYSE Euronext and Nasdaq OMX compete with upstart alternative platforms, brokerage networks and dark pools for market share – about a third of equities trading occurs off-exchange. But there is now a second layer of fragmentation. Each group wants multiple exchange licences, enabling them to offer different pricing models.
It is all about tailoring charges and rebates to attract different order flows – from retail money to the high-frequency traders providing much of the market's liquidity. Alternative trading outfits, such as Direct Edge, won share with innovative pricing and are seeking the legitimacy of exchange status. Peer BATS, already an exchange, is launching another platform this year. Nasdaq, meanwhile, is experimenting with the exchanges it bought in Philadelphia and Boston, not just on pricing but on ways to incentivise larger trades.
This type of trial and error, aiming to capture perhaps a few percentage points share, shows the ferocity of the US cash equities business. That has reduced execution costs for all traders, the largest of whom exercise considerable sway over new pricing structures. Not all ventures will succeed and four current exchanges have less than 1 per cent of trading. Even success stories can be fleeting – volumes quickly vanish once a better deal emerges.