Global exchange operator Nasdaq plans to launch a limit up-limit down rebate pilot in an attempt to tame severe equity-market volatility beginning on April 1.
Limit up-limit down is a mechanism that aims to prevent trades in a given security from occurring outside a specified price band.
“With a program like this, the hope is that it fuels competition for market makers and improves market quality,” said Walt Smith, head of U.S. equities at Nasdaq. “Market makers include the level of rebate in their models that they use to determine what an appropriate bids and offers they should put in the marketplace. We hope the increased rebate influences that model positively.”
Nasdaq market makers that display buy orders in an eligible symbol from when the the symbols enters a limit-down state until Nasdaq receives notice from the SIP that the symbol has exited that state will be eligible for an additional 10 mil ($0.001) rebate per share of that transaction.
If market makers display a buy order during a LULD trading pause for an eligible symbol, they will get a 5 mil ($0.0005) rebate upon order execution during the re-open process.
Work on the program began last November when Nasdaq CEO Bob Greifeld had a quick conversation with Smith in a Nasdaq Market Site hallway about developing a peak-load pricing pilot.
“Since then, it’s been working with our economic research team and going through various iterations and symbols,” said Smith. “Determining the exact level of improvement and what the right incentives should be is the reason why we’re starting with 200 symbols. This rate card is the first step.”
Nasdaq currently working on developing and implementing the 200 necessary and new liquidity codes for the eligible symbols.
Whether enough market makers will participate will bring the pilot to critical mass is one of the big ‘ifs’, according to Smith.
“We haven’t talked with every single market maker,” he said. “We talked to a handful of them to flush out the concept and have gotten positive feedback.”