At the Securities Industry Association’s fourth annual market structure conference in June, representatives of Nasdaq, the ECNs and the NYSE sat under the glittering chandeliers of New York’s Grand Hyatt slinging mud at each other.
Much to the bemusement of many in the audience of investors, traders, lawyers and journalists who witnessed this spectacle, the keynote speaker, Bob Greifeld, Nasdaq’s new chief executive, said: “Internalization is a confusing term and what it really means is competition.”
Unsurprisingly – because internalization is not so much a confusing term that means competition as a controversial one that means you may not necessarily get the best price – the gasps were audible and more than a few jaws dropped. Greifeld stayed to answer questions just long enough to be asked by an Instinet representative how internalization could help small investors. He then slunk out.
Ducking important questions was the order of the day, as profound debate on how US equities trading could be improved gave way to the individual market centres trying to further their self-interests and taking pot shots at each other.
Nasdaq’s chief economist, Michael Edleson, could be heard fulminating to his colleague on the escalator, after Archipelago’s chief administrative officer and general counsel, Kevin O’Hara, goaded him about Archipelago’s improving market share, which has come largely at Nasdaq’s expense.
But the low point for Nasdaq came towards the end, when the moderator of the market impact panel asked Glen Wolyner, Nasdaq’s executive vice-president of transaction services, whether Nasdaq really existed, or was not instead a “confederation of competitors eating its soul”.
The Mr T of finance Nasdaq was not the only victim, though. One panellist described the NYSE as a “big, ugly, slow-moving Mr T”. And to much applause from the audience someone asked the SEC in how many different languages it could say mañana. But the most unfortunate victims of the day were undoubtedly investors who have heard all the self-interested arguments of the market centres, and who have heard the SEC promise to do something many times before.
“We’ve been dealing with the same issues since 1975,” said one buy-side panellist, “and decisions need to be made for the good of the market as a whole, not for the interests of particular participants.”
Delegates to the conference were unimpressed when Annette Nazareth, director of the SEC’s market regulation division, showed up late, only to say, like all her colleagues that day, that she was expressing her personal views, which were not necessarily those of the commission. Her personal view that “when today’s markets are compared to those of 30 years ago, the national market system must be considered a resounding success by nearly any measure,” was met with some incredulity.
If the national market system is such a resounding success, why is no-one happy with it? Nasdaq is facing an identity crisis because it is operating within a legal structure that dates from 1934 and because its application to the SEC to become an exchange is still pending after two years. The ECNs are frustrated because the trade-through rule of the Intermarket Trading System (ITS) effectively forces them to yield to slower markets.
Investors aren’t happy either. George Bodine, director of trading at General Motors Investment Management Corporation, who sits on Nasdaq’s Institutional Traders Advisory Council, gave a presentation questioning the whole principle of competing market centres. “My ability to feel confident that I got the best price of the day for a block is no greater today than 20 years ago,” he said.
Galling words The only vocal defenders of competition in the national market system were Nasdaq and the ECNs. But it must have been galling for investors and brokers to hear Ed Nicoll, CEO of Instinet, argue that the trading of Nasdaq-listed securities is less fragmented than the trading of NYSE-listed securities. According to Nicoll: “Technology and communication today permit market participants to seamlessly and instantaneously access the prices displayed by all markets, eliminating fragmentation.”
But the existing technology he is referring to can’t possibly be that of the ECNs or Nasdaq. Otherwise brokers in North America would not have to spend $700 million a year on order routing and trade execution technology, as they are, according to TowerGroup, because the differences between trading venues would be slight. If all the market centres were seamlessly integrated and liquidity were not fragmented, much-in-demand liquidity aggregators and destination routers such as Lava and Sonic would not be the must-have products that they are.
Investors were also no doubt fed up with hearing the NYSE telling them that floor trading is still the most efficient way to trade. It’s true that execution on the floor-based NYSE is efficient, but this is because it is the largest, most liquid stock market in the world, not because the traders on the floor can find prices and execute trades faster or more accurately than a computer.
Already 90% of orders to the NYSE are sent electronically, so completing the process and executing them electronically is the obvious next step, and simply allowing floor traders to use mobile phones in the pit is not really going far enough. “New York is going to have to change to stop more volume moving off the exchange,” said one investor. At present, approximately 20% of trading in NYSE-listed securities takes place outside the exchange.
The SEC is well aware of the current problems with the market structure and the issues it has to resolve such as the definition of an exchange, the self-regulatory model, access fees, fair access, and how revenue from market data provision should be distributed. The sooner it starts acting the better. And in its deliberations it needs to start listening more to the needs of the institutions that use the market because the market centres don’t seem to be. “We don’t need more regulation or deregulation,” said one panellist, “we need re-regulation.”
