The London Stock Exchange (LSE) is cutting trading fees and introducing incentives for liquidity providers in a bid to attract algorithmic traders and fight off competition from alternative trading systems.
The LSE says its new tariff system - which takes effect from 1 September and applies to all trading clients - will create "the lowest net fee and largest credit of any venue in Europe" for clients that achieve upper bands for both liquidity provision and liquidity taking.
The LSE says the new pricing system is designed to unlock the potential for further growth from statistical arbitrage and algorithmic trading. The initiative also aims to reward liquidity providers for "competing more aggressively to offer tighter spreads and greater depth of liquidity".
Under the new pricing scheme, the London exchange will remove the 7.5 pence execution charge from both sides of trading, the one pence order management charge and the maximum per trade charge.
For large liquid stocks, a tiered credit scheme for liquidity provision based on value traded by a client in each month will be introduced. The discount scheme based on value traded in each month will also be simplified, says LSE.
For smaller company securities, market makers will receive a fixed credit rate for providing liquidity and a discounted charge for removing liquidity.
"The new shape of this tariff structure will capture the important growth arising from the major shift towards statistical arbitrage and algorithmic trading in UK equity markets," says LSE chief executive, Clara Furse. "This continues to be a major driver of change in market micro structure, driving overall growth and significantly improving market efficiency by reducing total transaction cost, thereby decreasing the cost of capital for the companies listed on our market."
LSE shares have been hit this year on concerns that it is losing an increasingly large part of its market share to new platforms such as Chi-X, which already claims it trades over 15% of LSE market share following its launch last year.
A raft of new platforms is set to enter the European markets this year - including systems from Nasdaq OMX and Bats Trading and the bank-backed Turquoise facility - following the introduction of the Markets in Financial Instruments Directive (MiFID) last November.
In a move that pitches it directly against the upstart rivals, the LSE said in June that it is teaming with Lehman Brothers to launch an off-bourse, pan-European equities trading facility - called Baikal - that combines a dark liquidity pool with algorithmic trading functionality.
The Baikal platform is slated for launch in the first quarter of 2009, subject to regulatory approval, and will offer access to securities across 14 European countries, with smart order routing to liquidity in at least 22 trading venues.
Last month the Financial Times (FT) reported that Lehman expects to secure agreements with rival investment banks to take stakes in the joint venture by the fourth quarter.