Tagged: data revenue

The Dark Arts

No, our title does not refer to Surveillance.  Despite the Thomson/Nasdaq deal last week.

Yesterday mavens of equity markets converged on Capitol Hill to debate trading woes. Apparently the Senate, unsatisfied with just one geological trope (“Fiscal Cliff”), must examine “Dark Pools.”

If you missed the news, we’ll summarize. On the Hill, leaders from the big exchanges argued that operators of trading facilities that don’t post prices and which may select which parties can participate in buying and selling are harmful to investors who want to know the true price and supply of stocks.

As you may know, “dark pools” are markets where equity traders may find shares without having to post a price, thus avoiding actions that might move market pricing or draw attention to orders. The price for shares in dark pools is determined by whatever price is best at the exchanges.

Exchanges naturally feel a bit like Best Buy in an internet world. You’re using our liquidity and our prices to determine what you can get at another market.

For their part, dark-pool operators including Credit Suisse (runs the world’s largest dark pool, Crossfinder) and ITG (operates POSIT) countered that markets are ill-served by an exchange oligopoly that writes its own rules, regulates itself and earns some $450 million in shared data revenue off the consolidated tape that is in effect a government-granted monopoly.

It’s akin to knowing that no matter what you do, if you match up trades at a certain pace you’ll earn a profit on data because it’s guaranteed – almost like rate-of-return utilities. Dark pools think that’s a whopping tradeoff for setting prices everybody else uses.

Joe Mecane, head of NYSE equities, made the point of the day though. The nature of markets fostered by rules has “created unnecessary complexity and mistrust of markets,” Mecane said. He wants Congress to simplify it. (more…)

NYSE Goes Retail

The recent SEC approval of plans by the NYSE to attract retail dark liquidity generated a nationwide acronym alert.

Just kidding. Mostly. But acronyms in hordes do assault readers of the NYSE rule. It was not readily apparent that the filing had been composed in English.

If you didn’t hear, the SEC last week approved plans by the NYSE to host undisplayed orders originating from retail investors for matching against high-frequency trades in sub-penny increments.

We don’t fault the NYSE. It’s trying to compete for data revenue under plans that require it to match at least 25% of trades to earn revenue from the data those trades generate. With its share of market slipping below that level in May, the need was urgent.

But there are problems here for IR pros and public companies beyond that fact that it represents an abrupt and contradictory about-face from the SEC. We could go on for pages but because some of you would become alcoholics as a result, we’ll confine ourselves to a single, overriding flaw:

The rule effectively establishes 1,000 price points per dollar. In Regulation National Market System, Rule 612, called the Sub-Penny Rule, states: “No national securities exchange, national securities association, alternative trading system, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share.” (more…)