As Christmas Eve arrives in the US, market-structure circles are abuzz on tidings from Intercontinental Exchange (ICE), parent of the NYSE, about bold market reform. Is it the birth of opportunity or a winter fable?
In case you missed it, word broke last week that ICE has proposed in a letter to the SEC a plan for fundamentally reforming the stock market. The missive wasn’t offered publicly but reporters have described the contents.
The plan aims to slash what are called access fees – charges paid by traders to purchase shares at the NYSE – from the current capped regulatory rate of 30 cents per hundred to five cents if brokers agree to send the bulk of orders to the exchanges.
The proposal would also ban the “maker-taker” model under which traders earn credits to offer shares for sale at the exchange. There are other elements too, including exceptions for block transactions and retail orders and ostensibly greater insight into data feeds.
Public companies have yet again been omitted from the planning. Why is there a pathological proclivity on the part of exchange operators and regulators to leave out the businesses paying hundreds of millions of dollars in listing fees and without whom there would be no stocks, indexes, ETFs, options or futures?
Getting past that annoying fact, there’s a lot to like because we’ve seen it before. We call the proposal “Back to Buttonwood.” The NYSE is a product of a two-sentence compact in 1792 inked under a New York City buttonwood tree by which brokers agreed to give each other preference and to charge a minimum commission. Brokers figured if they pooled orders they’d have more customers, and to make it work they’d agree not to undercut each other on price.
That construct in effect prevailed until 1975, when Congress decided the little guy was getting screwed by fixed commissions. So our esteemed legislators who knew nothing about stock-trading unfixed commissions as part of a revamp that created a national system of linked electronic markets. That’s today’s National Market System where exchanges have no broker-members and instead pay high-speed traders for orders. Now 222 years after the Buttonwood Agreement, the NYSE is proposing that brokers pool their books of business at the exchange under fixed commissions. Huh. Creative.
Brokers may agree to it because the writing is on the wall – vague biblical reference – for brokers like Credit Suisse that match trades in private markets called dark pools. It’s not because they’d save money. A five-cent charge seems cheap unless you know brokers now pay 30 cents to buy and earn about 29 cents to sell, so real current costs are lower.
But the NYSE we infer is making a concession in the opening and closing auctions. Exchanges charge the most for these, about $0.10/100 at the open and close to buy or sell. Everybody pegging a benchmark wants to trade near the open or close. Exchanges want your listing in part for the right to host these auctions (they should be paying you, not the other way around).
Most important for the NYSE is valuable data. If trading on their platforms sets prices, brokers and other markets must have that data to price algorithms and order-types and it can cost up to $27,000 a month. ICE had $212 million of data and technology-services revenues in the third quarter (source: earnings release), more than its net income of $206 million. By eliminating trading rebates, they’d save $175 million a quarter, and by encouraging brokers to bring orders to the exchange they’d fortify data revenues. There’s self-interested method here and there’s nothing mad about boosting the bottom line.
The Nasdaq is apparently supportive of the plan, while BATS/Direct Edge, the newest of the exchanges and current leader by market-share in total volume, opposes it. If you have stock listings, this structure is a plus. If you don’t, brokers will take trades elsewhere. BATS lists lots of ETFs but no stocks, and it’s owned by brokers who may pull orders and it’s preferred by fast traders who under this structure could suffer.
Three things matter to public companies. Number one, the structure should be simple enough for your board members to understand it. Regulators and exchanges should make that happen instead of leaving public companies in the hall outside the principal’s office. Number two, your costs should come down too (a case for zero can be made).
Number three, structure should increase opportunity for rational money to set prices. I think what the NYSE has proposed could maybe do that. Numbers one and two need work yet, so it’s too early to herald this arrival with angelic voices. But there is hope!
