Euronext announced today to slash the five cent tick size area. Beginning next month on April 1st, all stock options with a value below 50 cents will be trading with a tick size of one cent. This means a market of 0.47 – 0.48 instead of the current 0.45-0.50. The index options will remain unchanged.

At first this seems to be good news for retail investors, as the spreads will narrow. However, Euronext is still reluctant to lower their profit margin and maintains the transaction fees for retail investors and professional traders at high levels. A new trading environment is only for the others.

The exchange hopes to boost trading volume and pocket some extra profits. With the evaporating margins the transaction fees being paid to Euronext should definitely get extra attention. Euronext is very terribly expensive and the share of the profits taken by the exchange is very large when the spread is only one cent. Maybe it really takes another exchange for Euronext wake up and introduce competitive fees.

This so-called Premium Based Tick Size (PBTS) will have some more consequences. First of all, being a liquidity provider and quoting all the series will be a lot less attractive. This could eventually knock out some smaller market makers out of competition – or they will become market taker only. Quoting these kind of narrow spreads will require state-of-the-art technology with fast connections. Something which may be impossible for the small firms.
Jack
Jack