Abstract
BENN STEIL: What is an exchange? What exactly are its privileges and obligations? These questions have been foremost on the minds of the SEC for decades. Today, we have players that are not organized as exchanges. Now the question is, how should we accommodate new competition from these players?
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Notes
- 1.
Steil, in a follow-up interview, identified two of the main reasons why these new trading systems, or Alternative Trading Systems, were seeking recognition as exchanges. Exchange status would permit them to collect revenue from the dissemination of market data at the same time as the Securities and Exchange Commission had raised the regulatory requirements for being an ATS.
- 2.
The Consolidated Tape Association (CTA) supervises the dissemination of real-time trade and quote information in securities listed by the New York Stock Exchange and American Stock Exchange.
- 3.
Direct Edge was approved by the Securities and Exchange Commission on March 2010. It became operationally effective on July 2010.
- 4.
Under Regulation ATS enacted by the SEC in 1998, an ATS would become subject to more rigorous record keeping and reporting requirements once this system reached more than five percent of the trading volume in any given security. Reg ATS established two thresholds that applied to quote requirements and fair access. The law initially established a threshold of 20%, later lowered to 5% for quoting and fair access. Then in October 2009, the SEC proposed a series of regulations on non-displayed liquidity that would have reduced the quoting threshold only—not the fair access threshold—to 0.25%. As of writing in May, 2011, the proposal had still not been adopted, leaving the current fair access threshold at 5%. The SEC has not proposed changing that. “Importantly, the thresholds apply on a security-by-security basis and are considered breached only if an ATS exceeds them in four of six consecutive calendar months,” according to Justin Schack, managing director, market structure analysis at Rosenblatt Securities. “Practically, this means that any ATS wishing to avoid quoting or fair-access requirements need only ‘shut off’ trading in a given symbol as it approaches breaching the threshold, after which it can resume trading that security again.”
- 5.
Reg National Market System (NMS), enacted in 2007 by the Securities and Exchange Commission, aims to improve the quality of US market structure through significant enhancements in price executions and quoting processes, increment size and market data. Specifically, there are four distinct rules in Reg NMS: order protection for investors so they can get the best price anywhere with the elimination of trade throughs; improved access to quotations in the National Markets System via enhanced linkages and lower access fees; sub-penny trading on securities; and finally, market data reform that allocates formula-based revenues to market centers that offer improved access to market data.
- 6.
The debate specifically referred to the SEC idea to lower the 5% threshold in an ATSs’ market share of individual stock trading volume at which alternative trading systems must display quotes publicly and provide “fair access” to their markets. This, coupled with firming up the industry’s understanding of certain types of automated messages designed to seek liquidity, could reduce dark pool market share, according to analysts.
- 7.
Ross was vice president of NYSE MatchPoint, a point-in-time crossing platform of NYSE Euronext, from July 2006 to July 2010. He had previously held various other industry roles including as senior vice president in global institutional equity sales and equity crossing at Instinet, from 1989 to 2002.
- 8.
FIX is shorthand for the Financial Information Exchange protocol of messaging standards for the electronic communication of trading messages. See, http://www.fixprotocol.org/what-is-fix.shtml.
- 9.
The SEC enacted the limit order display rule and the quote rule in the order handling rules in 1997. The first rule requires market makers and specialists to display limit orders from customers when the orders are superior to the market maker or specialist’s quote. The second rule requires specialists and market makers to provide their most competitive quotes—that is, the lowest price at which the dealer will sell securities, and the highest price the dealer will agree to pay a customer to buy securities.
- 10.
Reg NMS, enacted by the SEC, made it easier for these ATS to compete on a more equal footing with the NYSE. In effect, they were together in the same tent. See, http://www.sec.gov/rules/final/34-51808.pdf.
- 11.
Listings are handled by exchanges in the USA. However, the moderator was asking whether it would make sense to have new regulation that would permit non-exchanges to handle listings also.
- 12.
Quadriserv’s AQS operates what it regards as the world’s largest CCP-based securities lending market that offers automated trading in over 5,000 underlying equity, ETF, index, and ADR products.
- 13.
See, SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets. Commission Also Takes Steps to Increase Market Transparency and Liquidity. Sept. 19, 2008 http://www.sec.gov/news/press/2008/2008-211.htm.
- 14.
Flash orders have been offered by some market centers using advanced computer technology that allows traders to view orders from market participants in fractions of a second before others in the marketplace get to view them. These orders have been controversial because the practice of flash orders is said to give flash traders the advantage of being able to weigh up supply and demand and recognize movements in the market before other traders. Traders Magazine has defined a flash order as “a marketable order sent to a market center that is not quoting the industry’s best price or that cannot fill that order in its entirety. The order is then flashed to recipients of the venue’s proprietary data feed to see if any of those firms wants to take the other side of the order. This practice enables the market center to try to keep the trade.” See, http://www.tradersmagazine.com/issues/20_300/sec-flash-orders-high-frequency-104587-1.html?zkPrintable=true.
- 15.
Designated Market Makers were formerly known as specialists who act as the official market makers in given securities.
- 16.
See NYSE Euronext opposes “flash trades,” reports loss. Jeremy Grant, Financial Times, July 30 2009 http://www.ft.com/cms/s/0/337eaa68-7d29-11de-b8ee00144feabdc0,dwp_uuid=60835a20-4167-11de-bdb7-00144feabdc0.html#axzz1Mhuc6NoI. See, SEC Approves Short Selling Restrictions, Feb 24, 2010 http://www.sec.gov/news/press/2010/2010-26.htm.
- 17.
See, SEC Approves Short Selling Restrictions, Feb 24, 2010 http://www.sec.gov/news/press/2010/2010-26.htm.
- 18.
For example, See, Elkins/McSherry—Global Transaction Costs Decline Despite High Frequency Trading, John Aidan Byrne, Nov. 01, 2010 http://www.institutionalinvestor.com/Article/2705777/Research.
- 19.
See, Liquidnet to Sellside: Send Us Your Blocks, Nina Mehta, Traders Magazine, March 23, 2009. http://www.tradersmagazine.com/news/-103556-1.html.
- 20.
See, Flash Point, Equities industry clashes over flash and step-up orders, Nina Mehta, Traders Magazine, July 9, 2009. http://www.tradersmagazine.com/issues/20_296/-103978-.
- 21.
Direct Edge Adds Auctions to Flash Orders That Schumer Opposed, Nina Mehta, Bloomberg, Nov. 24, 2011. http://www.businessweek.com/news/2010-11-24/direct-edge-adds-auctions-to-flash-orders-that-schumer-opposed.html.
- 22.
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Steil, B. et al. (2013). Regulation’s Impact on Competition. In: Schwartz, R., Byrne, J., Schnee, G. (eds) Rethinking Regulatory Structure. Zicklin School of Business Financial Markets Series, vol 10. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-4373-5_3
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