changes in market structure: approaches to securities trading 15 april 2003
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Changes in Market Structure: Approaches to Securities Trading 15 April 2003. Alfred R. Berkeley, III Vice Chairman The NASDAQ Stock Market. Creating An Efficient Consolidated Market. National Markets. Broker-Dealers. Competitive Challenges – Fragmentation Improve Access and Lower Costs. - PowerPoint PPT PresentationTRANSCRIPT
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Changes in Market Structure:Approaches to Securities Trading
15 April 2003
Alfred R. Berkeley, IIIVice Chairman
The NASDAQ Stock Market
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 2
Creating An Efficient Consolidated Market
• Competitive Challenges – Fragmentation• Improve Access and Lower Costs
Secondary Markets
National Markets
Broker-Dealers
Electronic Brokerage
Firms (ECNs)
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Three Liquidity Models
Bull
Bear
PanicThre
e Ty
pes
of M
arke
ts
Accelerated Steady DecliningThree Types of Growth
MultipleLiquidity Providers(NASDAQ)
SingleLiquidity Provider(NYSE, AMEX)
No Professional Liquidity Providers(ECNs)
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Three Liquidity Models
Bull
Bear
PanicThre
e Ty
pes
of M
arke
ts
High Volume Medium Volume Low VolumeThree Types of Activity
MultipleLiquidity Providers(NASDAQ)
SingleLiquidity Provider(NYSE, AMEX)
No Professional Liquidity Providers(ECNs)
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 5
Average Daily Trades by Dollar Value of Float Category
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
$100 to$250
$250 to$500
$500 to$1,000
$1,000 to$5,000
$5,000 to$50,000
Greater than$50,000
Dollar Value of Float (mil.)
Aver
age
Daily
Tra
des
NASDAQNYSE
Average daily trades for all stocks within each dollar value of float category. All common stock on NASDAQ National Market and NYSE; NYSE data represent specialist trades only. Source: NASDAQ ER DataMart, FactSet Research Systems. December 2002.
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 6
OldNASDAQ NYSE ECN
Dealer InterventionContinuous Support
xLimit Order BookTransparency, Critical Mass
x Electronic ExecutionSpeed
x AuctionPrice Improvement x xCompetitionBenefits Investors x
Severe Competition in the 1990s
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 7
OldNASDAQ NYSE ECN New
NASDAQ
Dealer InterventionContinuous Support
x Limit Order BookTransparency, Critical Mass
x Electronic ExecutionSpeed
x AuctionPrice Improvement x x CompetitionBenefits Investors x
Integrating Market Models Improves Liquidity
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 8
NASDAQ Initiatives Reduce Liquidity Costs• NASDAQ continues to enact a variety of initiatives to reduce
liquidity costs, ultimately reducing the cost of capital and increasing shareholder value.
Value = NPV(Cash Flows)(1-Cost of Capital)
Direct Cost
TaxesFeesMarket Charges
Commissions
Opportunity Cost
Adverse Selection
Bid/Ask SpreadLong-termDecline in Spreads
Post-Trade Market Impact Cost
Depth at Quote, Reserve Size
Execution Delay
Pre-Trade Market Impact Cost
SuperMontageSM, Primex
Market MovementBefore ExecutionFast Execution
Cost of Capital = Risk Premium + Liquidity Premium
Risk Free Rate of Return
Company RiskIR tools,
Brand Development
Source: Amihud, Yakov and Haim Mendelson, “The Liquidity Route to a Lower Cost of Capital’” Journal of Applied Corporate Finance, Volume 12, Number 4, Winter 2000, 8-25.
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 9
SuperMontageSM Addresses Competitive Challenges
TotalViewSM Detail
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Slide 10
Greater Depth, Stronger Center of Liquidity
Average Cumulative Depth of Book Before SuperMontageSM
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
-5 -4 -3 -2 -1(Inside
Bid)
0 1(Inside
Ask)
2 3 4 5
Dolla
r Val
ue o
f Sha
res
Avai
labl
e
ReserveDisplay
Source: NASDAQ.
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 11
Greater Depth, Stronger Center of Liquidity
Average Cumulative Depth of Book After SuperMontageSM
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
-5 -4 -3 -2 -1(Inside
Bid)
0 1(Inside
Ask)
2 3 4 5
Dolla
r Val
ue o
f Sha
res
Avai
labl
e
ReserveDisplay
• With more and more market makers submitting orders at multiple price levels, depth should continue to increase.
Source: NASDAQ.
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 12
Impact of Changes on Market Quality
Average Execution Speed (secs)
4.8
21.7
NASDAQ NYSE
Data represent execution quality for S&P 500 issues listed on NASDAQ vs. those listed on the NYSEIncludes time for Market Center’s proprietary systems as mandated by SEC Rule 11Ac1-5. Based on all marketable orders up to 9,999 shares. Marketable orders are represented by both true market orders and limit orders that are at or within the prevailing bid-ask quote.Source: Market Systems Inc. December 2002.
• NASDAQ-listed S&P 500 stocks execute faster, with lower transaction costs and better pricing than NYSE comparables.
Average Effective Spread (¢)
1.9
2.8
NASDAQ NYSE
Average Quoted Spread (¢)
1.1
2.5
NASDAQ NYSE
Average Ex. Price Rel. to the Quote
15% 23%
71% 56%
14% 20%
NASDAQ NYSE
Price Improvement
At theQuote
Price Dis-Improvement
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 13
Improved Liquidity as a Result of Changes
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
$100 to $250 $250 to $500 $500 to $1,000 $1,000 to $5,000 $5,000 to$50,000
Greater than$50,000
Dollar Value of Float (mil)
Avg
Amiv
est L
iqui
dity
Rat
io (0
00)
NASDAQNYSE
The Amivest Liquidity Ratio measures the amount of dollar volume of trading associated with a one percent change in price over a twenty-day period. Includes all domestic common stock on NASDAQ National Market and NYSE.Source: FactSet Research Systems. December 2002.
• More stock can be bought or sold on NASDAQ without impacting the price.
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.
Slide 14
Offer PriceGoldman Sachs. . . . . 25.05NASDAQ SIZE. . . . . . 25.05Hong Kong. . . . . . . 25.10Schwab Capital Mkts. . 25.10CS First Boston. . . . 25.10Tokyo. . . . . . . . . 25.10Merrill Lynch. . . . . 25.10Salomon Smith Barney . 25.15...
Bid PriceHong Kong. . . . . . . 25.00Morgan Stanley . . . . 25.00NASDAQ SIZE. . . . . . 25.00Merrill Lynch. . . . . 24.95Deutsche Börse . . . . 24.95Instinet . . . . . . . 24.95Spear Leeds. . . . . . 24.95Singapore. . . . . . . 24.95...
Tomorrow’s Market• International Exchanges, Electronic Networks and Traditional
Market Makers Compete for Every Trade.
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Slide 15
Fair Allocation of Regulatory Costs
• Increasing Fragmentation of the Market for Trading NASDAQ Securities
•Need to Rebalance the Costs of Regulating that Trading
©Copyright 2003, The Nasdaq Stock Market, Inc. All rights reserved.