Exchange CEOs Explore Dark-Pool Limits in SEC Talks

Tuesday, 09 Apr 2013 07:01 PM

 

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The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc. met with U.S. Securities and Exchange Commission officials to discuss the migration of trading from their venues to dark pools, a person with knowledge of the meetings said.

The meetings in Washington Tuesday follow requests by the exchanges that regulators consider measures to curb dark pools, which let traders buy and sell large orders that aren’t publicly displayed. Possible restrictions include a “trade-at” rule that would allow dark pools to execute trades only if they offered better prices than are available on exchanges. They currently can trade at the best prices exchanges provide.

SEC staff members didn’t commit to consider any new rules and said the agency would continue to discuss the matter, said the person, who requested anonymity because the meetings aren’t public. SEC Commissioner Daniel Gallagher, one of two Republicans on the five-member panel, said he was meeting with the CEOs of Nasdaq OMX and Bats Tuesday.

“The numbers are pushing them to really want to refocus regulatory attention,” Gallagher said. “If you look at the market share of exchanges, the numbers are at all-time lows.”

The drive to curb dark pools underscores the level of competition between broker-dealers and exchanges, according to Miranda Mizen, a New York-based director of equities research at Tabb Group LLC. Brokers that run dark pools including Credit Suisse Group AG, Goldman Sachs Group Inc., Citigroup Inc. and Getco LLC are among exchanges’ biggest member firms.

‘Keep Talking’

“If the exchanges collectively keep talking to the SEC, it is unlikely that we will see no action at all, although the SEC has its hands full,” Mizen said in a phone interview. “This is a question of how people compete and the regulatory frameworks that they compete under.”

Alternative venues such as dark pools “operate under a less-rigorous regulatory framework,” Duncan Niederauer, CEO of NYSE Euronext, owner of the New York Stock Exchange, said in congressional testimony last June. Less regulation and fewer hurdles for brokers to start venues have boosted off-exchange trading, he said. More than 40 dark pools trade U.S. stocks.

NYSE had about 75 percent of volume in Big Board-listed companies in 2005 and has 20.3 percent now, according to data compiled by the exchange and Bloomberg. U.S. equities volume has declined three years in a row, to 6.42 billion shares a day last year from 9.77 billion daily in 2009, the data show.

Price Discovery

Robert Greifeld, the CEO of Nasdaq, and Joe Ratterman of Bats have also urged regulators to curb trading away from exchanges, saying it hurts the so-called price discovery function they perform by reducing incentives of market makers and others to supply higher bids and lower offers.

“It’s pretty simple math,” Justin Schack, managing director and partner in charge of market structure analysis at Rosenblatt Securities Inc., said by phone. “Volumes have been down marketwide three years in a row and the share of volume off-exchange has gone up, so exchanges are getting a smaller share of a shrinking pie. This trend is hurting their U.S. equities businesses.”

A case could also be made that Niederauer and Greifeld as CEOs of public companies have a duty to shareholders to pursue rules that would drive more trading back to exchanges, he said.

Trading away from U.S. stock exchanges reached a high of 36.2 percent in the first quarter, compared with 32.8 percent last year, according to data compiled by Bloomberg. About 14.3 percent of overall trading took place in dark pools in January and February, data from Rosenblatt showed.

SRO Debate

SEC Commissioner Gallagher said in October that Congress should modernize laws built around the framework of self- regulatory organizations, or exchanges, in the current high- speed, electronic era of rival venues that outsource much of the oversight they once performed themselves. He questioned whether they should remain self-regulatory organizations, or SROs, and said a broad analysis of the U.S. market and regulatory structure should tolerate “no sacred cows.”

Nasdaq Stock Market’s botched initial offering of Facebook Inc. last May pushed brokers including UBS AG and Citigroup to criticize the limitation on liability from private claims that exchanges get because of their SRO status. The debacle led to about half a billion dollars in losses by some of the biggest brokers. Friction between exchanges and brokers has increased as exchanges became for-profit corporations with shareholders over the last decade and the members that once owned them created private venues to execute orders.

“This is just the latest episode in a long-running escalation of tension between exchanges and brokers,” Schack said. “Each side is looking at this and saying we wish the playing field were more level,” he said. “But in which direction does the playing field get tilted to make it more level? Which side gets hurt? We don’t know the answer to that.”

© Copyright 2014 Bloomberg News. All rights reserved.

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