Nasdaq has told the Securities and Exchange Commission that Wall Street's conversion to decimal trading earlier this year is likely to have a long-term impact on the nature and level of liquidity provision and commission structures.
In its initial assessment of the impact of the changes on the US markets, Nasdaq says that the shift from quoting prices in fractions to penny increments is already impacting the profitability of market making operations. Nasdaq reports that quoted spreads went down by 51% on all shares following the move to decimals, with the decline most pronounced for more active and lower priced stocks.
Nasdaq believes market makers are likely to adapt to the new decimal environment by reducing the size of their auto-execution guarantees on the inside spread and by developing "other innovative business practices". Nasdaq says there is already evidence of some market makers responding to the changing economics of auto-execution guarantees based on smaller, thinner and faster moving spreads.
Godlman Sachs is the first of the big beasts of Wall Street to go public in floating the idea of introducing explicit fees for trading stocks, rather than the current practice of burying its margin in the quoted spread. Other top investment banks are believed to have approached their institutional clients with similar proposals.
A switch from negotiated fees to explicit charging in Nasdaq would bring the market more in line with the New York Stock Exchange.