Jeff Sprecher and the Intercontinental Exchange [the man and the institution that purchased NYSE Euronext for $8.2 billion in 2013] have proposed a “grand bargain” that would address several of the most contentious market-structure issues of our day. It sure wouldn’t resolve them, but it would address them.
Who is “bargaining” with whom exactly? In general, Sprecher is suggesting, on behalf of the exchanges, that the investment banks should stop competing with them. If they do so, by draining their pools, the exchanges will do something nice for them in return: by lowering their trading costs. That’s the deal, the rest is detail. Amongst the details the burning question is: how can be bargainers get the regulators to assist us in this mutual accommodation?
The elements of the bargain are as follows:
- A sharp reduction in the access fee cap for trading centers. It now stands at $0.003. Sprecher would drop it to one-sixth of that, $0.0005. At present, in the context of maker-taker pricing, many trading centers charge the takers of liquidity a fee close to the maximum, but rebate a portion to the makers of liquidity. Over time (since the cap was first set by Reg NMS in 2005) spreads have fallen and the cap has become a more significant element in overall transaction costs. Thus, a new much mower cap would be a boon to the takers.
- In conjunction with this, Sprecher proposes a trade-at rule with limited exceptions. The idea is to make life more difficult for broker dark pools, pushing order flow back into the public exchanges. These two steps are complementary: what the exchanges lose on the reduction of the access fee cap they win back by the trade-at rule and its consequences. For investment banks, reverse that.
But, if liquidity is a good thing, isn’t a bargain that works for investment banks and exchanges at the expense of those makers a bad thing? Let’s put that aside, and get back to the terms of the bargain.
- Sprecher wants to eliminate maker-taker or rebate-based pricing altogether. Or does he? That sounds like a matter of definition. ICE and NYSE believe, he writes, that “the potential conflicts and complexity that ensue from the maker-taker models outweigh any perceived benefits.” As for incentivizing marker makers, he suggests obligating them instead, “in return for lower fees, guaranteed share allocations, etc.”
This bit is a recipe for confusion. If this gets to the stage where somebody is actually writing detailed regulations based on a generally agreed upon bargain, then the distinction between incentives that will be allowed and incentives that won’t be allowed (what counts as a forbidden maker-taker pricing system) will have to be spelled out in all its dubious glory, and catch-all expressions like “etc.” won’t help. I anticipate endless games-playing in a way that looks a lot like the games-playing that has helped create the present level of dissatisfaction.
- More transparency for market centers. This means for example more disclosure regarding “the functionality and usage of order types, as well as periodic data on dark v. lit volumes as it pertains to exchanges….”
Protected Quotes and Metaphors
- A minimum market share threshold before a market centers’ quotes count as “protected” quotes within the national market system. This would reduce the fragmentation of the contemporary market.
The NMS offers “order protection” for buyers, that is, an assurance that their trades will not be executed at a price inferior to the price available at the same time at another trading center, the national best bid and offer. Sprecher is suggesting that if a buyer chooses to use a market center with less than the threshold share of the security to be purchased (1%), then the buyer is unprotected vis-à-vis the NBBO. That is a natural lead-in to the final point in the bargain….
- Greater consistency and clarity regarding market data feeds. Sprecher refers here both to the SIP and to private data feeds, which “continue to raise fairness questions among investors and market participants.”
The whole dynamic here is frankly a disturbing one. The market structure difficulties to which Sprecher’s plan alludes are chiefly the consequence of regulations designed to level the playing fields of the markets for different classes of investor and trader, and with all the ambiguities and confusions usually built into that over-used metaphor. The ideal way to address those difficulties is to rethink that whole market-regulatory system.
Instead, Sprecher seems to propose an old-fashioned cronyist deal, in which the big players sit around a center and cut a deal to their mutual advantage, and in which the regulators act in accordance with that deal because it is phrased in terms of the public interest.
Who is hurt? Generally anybody who isn’t at the table.