NYSE Extends Rebates as Exchange Seeks to Rebuild Market Share

By Edgar Ortega

Feb. 3 (Bloomberg) -- NYSE Euronext’s plan to extend rebates to all brokerages that trade at the New York Stock Exchange shows Chief Executive Officer Duncan Niederauer is betting higher market share will boost profit as equity volume dries up.

NYSE Euronext will start paying incentives next month to all traders posting orders to the Big Board as it overhauls fees for U.S. stocks. The plan revamps an incentive program offered only to NYSE market makers that some analysts said was too expensive.

Niederauer is combating a decline in the company’s share of trading at a time when analysts forecast profit will fall for the first time since NYSE Euronext went public in 2006. He’s boosting rebates on the NYSE and the electronic Arca platform to make good on a goal of capturing 50 percent of NYSE-listed trading, reversing a four-year slump to a record low to 41.9 percent.

“The moves taken together represent the belief that rewarding liquidity providers will create more attractive, higher-volume venues,” said Ed Ditmire, an exchange analyst at Fox-Pitt Kelton Cochran Caronia Waller who has an “outperform” rating on the stock. “They are trying to make their platform more competitive in terms of price, while at the same time making upgrades that close an extremely large gap in terms of execution speeds with rivals.”

NYSE Euronext’s trading in Europe fell 21 percent in January from a year earlier, while trading at the Big Board slowed 28 percent to a daily average of 1.33 billion shares.

Technology Overhaul

The pricing plan comes as the NYSE completes a technology overhaul that will cut the time it takes to process orders to less than 10 milliseconds, compared with 0.2 milliseconds for Bats Exchange, an all-electronic platform based in Kansas City, Missouri.

In November, the NYSE eased restrictions on market makers, such as rules that prevented them from sharing computers with parent firms. Buying and selling by the traders, who are responsible for maintaining orderly markets for stocks, more than doubled, according to exchange data.

NYSE Euronext matched 43.4 percent of trading volume for NYSE-listed companies in December, up from an all-time low of 41.9 percent in August, according to data on its Web site. The company’s slice of Big Board-listed volume was 76.2 percent as recently as 2004.

“They can’t afford to lose any more market share because it’s so critical to their listing business and to their overall brand,” said Justin Schack, vice president of market structure analysis at New York-based Rosenblatt Securities Inc.

Taking Liquidity

To fund the increased rebates, NYSE Euronext will next month raise the amount brokers pay to buy and sell shares based on bids or offers that have already been placed with the exchange, a process known as “taking liquidity.” The new fee structure helps mitigate the costs of a two-month-old program that required the New York-based exchange to pay about $30 million a quarter to NYSE market makers, according to Goldman Sachs Group Inc. analyst Daniel Harris.

“The goal is really about encouraging more liquidity providers by offering a more attractive rebate,” Colin Clark, NYSE Euronext vice president of competitive analysis, said in an interview. The effect on NYSE Euronext’s revenue “is going to depend ultimately on customer behavior and the interaction of the order flow,” he said.

NYSE Euronext shares tumbled 78 percent since the end of 2007, compared with a 73 percent drop for the FTSE/Mondo Visione Exchanges Index, amid concern brokerages and hedge funds will pare their use of borrowed money to buy and sell assets. The biggest annual drop in the Standard & Poor’s 500 Index since 1937 and more than $1 trillion in bank losses wiped out about 920 of the 10,096 hedge funds in business at the start of 2008, according to Hedge Fund Research Inc.

Rising Dollar

NYSE Euronext’s stock slumped 12 percent yesterday after analysts at Goldman Sachs and KBW Inc. said the rising U.S. dollar and a slowdown in trading may crimp earnings this year. The company will report fourth-quarter profit of 57 cents a share excluding some costs next week, according to the average estimate of 18 analysts surveyed by Bloomberg. That compares with 66 cents a year earlier.

Niederauer plans to reduce $250 million in annual costs by 2010 through cutting jobs and sharing technology across exchanges in Europe and the U.S.

“While the industry is under pressure, the company is undergoing a big restructuring,” Ditmire said. “They seem to be buckling up for a bumpy road in 2009.”

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.