04 March 2010

Co-Authors

Justin Schack

Director

Joe Gawronski

President and COO

Rosenblatt Securities Inc.
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NYSE to Add Global Market Maker GETCO as DMM
—Press Release

NYSE Euronext and GETCO LLC, a global electronic trading and technology firm, today announced that GETCO is expected to become a New York Stock Exchange (“NYSE”) designated market maker (“DMM”), and that GETCO has purchased approximately 350 NYSE DMM assignments from Barclays Capital.  Financial terms of the transaction were not disclosed.

Our Take: We wondered aloud in last month’s News Digest about whether a piece of the LaBranche book would wind up in the hands of a “true” high-frequency trading firm like GETCO. Now we have our answer. NYX’s NYSE Classic market should see its market share increase in the 350 stocks for which GETCO is now the DMM, because the firm — understatement alert — is a far more efficient market maker than was LaBranche. But any such gains should come at the expense of profit margins, as DMMs earn a fat 30-cents-per-100-shares rebate for providing liquidity, against only 18 cents per hundred paid by NYSE liquidity takers. And 89% of DMM trades provide liquidity, according to NYX. Recall that a few months after the DMM program began in November 2008, the pressure on margins prompted NYX to raise the NYSE Classic take fee from 8 cents per hundred to the current 18. The impact from this move likely won’t be as dramatic, as it only affects a fraction of NYSE-listed securities, but we wouldn’t be shocked to see DMM rebates scaled back at some point in the future.Additionally, although NYX’s market share gains may be offset somewhat by margin compression, this move is surely not good news for NDAQ, BATS and Direct Edge, who will face increased competition for Tape A market share. They’ll also have a tougher time winning Tape C business when NYX starts trading Nasdaq-listed stocks using a DMM-based model through the Amex, likely within a few weeks.