August 7, 2013

Pondering Exchanges

In France we saw Auguste Rodin’s famous sculpture, The Thinker. You know the one? A chiseled fellow (literally and figuratively) pondering in the nude.

It’s good to sit down and think (no need to disrobe however). Why are you here? I mean, on an exchange. If the market today consists of 17 different registered exchanges, at least 40 alternative trading systems for matching trades (dark pools), and some 4,300 brokers and dealers regulated by FINRA (the old NASD Bernie Madoff once chaired), why is one marketplace the Garden of Eden for your company’s public birth?

Let’s go one step further before answering that question. FINRA, the regulator for brokers, generates over $800 million in revenue annually. The exchanges have among the most powerful congressional lobbying organizations in Washington DC, with close ties to eminent New York congressman Chuck Schumer. SIFMA is headed – as we noted last week – by former congressman Judd Gregg. Then you’ve got the SEC, the CFTC, now the CFPB, regulatory potentates all.

And public companies have NIRI. Jeff Morgan and crew are in the deep rough! That’s why it’s so hard to change 13F reporting periods or improve data for public companies. It’s not that these others are arrayed against issuers. But the regulators, the exchanges, the investors, the traders – they show up in size. Issuers thus become bystanders.

I checked the status of NIRI’s joint petition with the NYSE and the Society of Corporate Secretaries to shorten 13F reporting periods. Remember it? There are 1,600 corporate members of NIRI, give or take. There are 1,800 or so National Market System companies listed on the NYSE (stripping out multiple classes of stock, ETFs, closed-end funds and so on). Less than 100 companies have submitted the petition.

Sure. You could argue that about 10% of the colonial populace actively supported the American Revolution and that was enough to get it done. But you’d think more would show up, right?

The reason your shares are listed at an exchange is because regulations require it. But when those rules were crafted in the 1930s, exchanges were marketplaces operated symbiotically by broker-members. Now, your shares list at an exchange that’s in direct competition (thanks to more rules) with the brokers who underwrote them. Yet even more rules require brokers to do business with exchanges – who then sell data back to brokers.

Perhaps wondering how this can be fair, SIFMA – thank you alert reader Walt Schuplak at the Market Intelligence Group! – has written to the SEC asking the Commission to reconsider the special regulatory status of exchanges. It’s a compelling argument.

Here’s my question: Will we ever see the day when public companies lead rather than follow in the equity market? We should be setting this agenda, not reading about it. Maybe out there in an IR chair is this profession’s Joan of Arc. Or Sam Adams.

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