Nasdaq’s dominant role in trading network
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According to the Wall Street Journal, one of the world’s largest high-frequency trading firms, Virtu Financial Inc. recently proposed a criticizing proposal to Securities and Exchange Commission(SEC) about Nasdaq Inc.’s raising price for its market data service. The “Ultra” service, which required trading firms to pay additional fees to obtain information processor, is operated by Nasdaq. There are only two SIPs in the country, the other is managed by New York Stock Exchange. Almost every high-frequency trading firms in the market need to use this data system to get the market data. Since trading firms have no other choice, even though they think this payment is unreasonable and it only benefits Nasdaq, they have to pay the increased money anyway.
This news is closely related to trading network which discussed during the class. Trading firms are the buyers of this important service which helps them make money. There are hundreds of these trading firms in Wall Street, but there are only two organizations provide this service. When we analyze the trading network of this situation, the result is NYSE and Nasdaq both have many alternative options to provide this service. For trading firms like Virtu, they have very limited options. For most cases, they have only one option to choose. For this case, the Nash equilibrium is Nasdaq is very strong and other trading firms are very weak. For all trading firms, they have a little impact on the price of the system so the best method to deal with situation is to file a complaint to SEC. Although this $60,000 fee annually may not be very significant for these profitable firms, they realize that even combine their opinions together can’t change Nasdaq’s decision. Maybe the only way to change this situation according to network trading theory is that trading firms are able to find some alternative methods other than Nasdaq to improve their power, other than that, it is difficult for them to become more powerful in this trading network.