The Tradescape Corporation, one of the nation’s largest day-trading firms, said yesterday that it would pay its customers to place certain stock orders with MarketXT, the company’s electronic trading network.
The move, intended to build anemic trading volume at MarketXT, which began its operation as an after-hours trading system in late 1999, could also heighten competition among the nation’s biggest electronic trading networks, like Island ECN and Instinet, a unit of the Reuters Group.
It is also the first time that retail customers, in this case active day traders, will be paid to trade stock.
“This is an entirely new way of operating,” said Omar Amanat, Tradescape’s chief executive. “You’re now getting paid to trade; there’s a sub-zero transaction cost here.”
Though “payment for order flow” has long existed in the financial markets, typically with big trading firms, or market makers, paying retail brokerage firms for routing large orders through them, the move by Tradescape attempts to reward retail customers.
As such, the new plan is yet another attempt to shift the balance of power on Wall Street away from the big institutions and toward the smaller players, like the day-trading firms that helped revolutionize low-cost online trading. The goal is essentially to have big institutions eager to find and match orders to pay fees to MarketXT for making larger and larger trading volumes available.
Under the plan, Tradescape, a privately held company based in New York that bought MarketXT last year for $100 million in stock, said it intended to pay its customers a penny a share, or up to $10, for Nasdaq limit orders placed on the MarketXT system and executed by a retail brokerage firm or large institution.
So Tradescape customers — mostly active day traders — would pay the regular $7.95 trading commission, but in a 1,000-share limit order executed on MarketXT by a big institution or broker, the customer would receive a $10 rebate, thereby creating a net payment of $2.05 for their order.
The goal, Tradescape hopes, is to make MarketXT a leading electronic communications network and one better able to compete against Instinet and Island ECN, which generates volume of about 357 million shares a day, compared with about 5 million for MarketXT.
The payoff, Tradescape officials hope, will be in the strength and revenue generated from MarketXT. Although the company will essentially be giving up the revenue it generates from its trading commissions, executives say they will generate even larger revenue on the back end, when brokers and institutions pay $5 to $15 for every 1,000 shares for finding matching trades on MarketXT.
Executives at Tradescape also think day-trading volume will explode if traders have greater incentives — and even bonuses — for trading more often. The company’s own customers will not be charged fees for matching orders on MarketXT.
“This is the next logical step on Wall Street,” said Mr. Amanat, 28, who helped found Tradescape. “The reason we bought MarketXT was to try this pricing strategy.”
Matthew Andresen, the chief executive at Island, said the plan by Tradescape could heighten competition among electronic trading networks, some of which are petitioning to become full-fledged stock exchanges.
But he said the plan would face obstacles in trying to lure customers away from the most popular trading networks, like Island. “It’s an interesting gimmick, but in the end people are going to go where the order flow is,” he said.