Celent’s new report on “Execution Quality in the NYSE Market,” contributes to the sense that a once considerable gap between the top market centers and everybody else, in technology and expertise, has effectively disappeared.
The NYSE’s top three market centers are Nasdaq MC, EDGX Exchange, and Barclays Capital. But as the report’s author, Anshuman Jaswal, put it, the gap between those and the others is now “not substantial.” This is good news, he also says: its disappearance will benefit customers.
Further (perhaps a related point) the share of two of those, Nasdaq MC and EDGX, has declined since November 2012. The market share of Barclays has grown, but so has the market share of Getco Securities, BATS Exchange, and NYSE Arca.
Two Axes of Excellence
Jaswal measured execution quality along two axes: speed and price. Speed is a straightforward measurement of the time between the placement of an order and its execution.
The metric for price (as en execution issue) is a bit trickier. In this report, Celent relies on the ratio of the effective spread on the one hand and the National Best Bid or Offer, that is, the quoted spread, on the other. What is the “effective spread”? Celent defines it as double the difference between the achieved price and the midpoint of NBBO. The report’s Figure 2 gives a graphic sense of how this works:
Thus, given the metric used here, the lower the effective-to-quoted spread, the higher the quality of the execution.
Taking the two axes of measurement as above: what can we say about the execution speed of the NYSE?
We can say, to begin with, that electronic order books are consistently faster than are specialists, and that market makers are consistently – across all order sizes – faster than either of the other two types of market center.
Also, Celent tells us, “The speed of execution has [over the last year] become slower overall for specialists but has become faster for market makers.” For the EOBs, speed has improved for smaller order sizes but slowed for larger orders.
Firm by firm, the speediest executions for the most actively traded stocks come from BATS Y-Exchange, NSX, and Wells Fargo. For less actively traded stocks, the fastest executions come from BATS Exchange, Goldman Sachs, and the EDGX Exchange. NYFIX ConvergEx Millennium ATS and Getco Securities also perform well on execution speed across order types.
Turning to Price
The report says that some of the better performers on price are: Liquidnet, Wells Fargo, and NYFIX ConvergEx.
For large market and marketable limit orders for mid-active issues in particular the smallest e-to-q spread (and thus the best price execution) is that of Liquidnet, followed by Citigroup Global Markets and Instinet. The least impressive performance in this particular category was that of Nasdaq BX. The average spreads here are “similar to those seen in the last survey.”
But if we combine all categories of order size and both of these axes of measurement, speed and price performance: who ‘wins’? Who gets the best bang for the microsecond, so to speak?
BATS Exchange, NYSE Arca, NATS Y-Exchange and Goldman Sachs seem collectively to prevail, although Celent offers the sensible caveats about how “direct comparisons between very different market models … are sometimes fraught with difficulty.”
The survey relied heavily on Rule 605 reports filed with the Securities and Exchange Commission. More information about the methods of the study is set out in the report’s Table 4, reproduced below.
The report also considers the respective market shares of the three sorts of market center. The share of EOBs has declined to 56% after a recent peak of 58%. The market makers and specialists have each seen a slow increase in market share.