April 1, 2014

NYSE, Nasdaq Push for "Trade At" Rule

By John D'Antona Jr.

The two biggest exchange rivals are joining forces to push through a rule designed to curb trading that occurs off-board away from the public eye, according to a report in the Wall Street Journal.

People familiar with the matter told the Journal that Nasdaq OMX and NYSE Euronext have formed an alliance of sorts to jump-start the creation and implementation of a controversial rule, dubbed "trade-at," to be added to a pilot program under consideration by the Securities and Exchange Commission to widen tick sizes, or the increments between price quotes, for certain companies.

The proposed trade-at rule would mandate that trades for those stocks take place on the exchanges unless other venues offer significant price improvements.

Analysts have said that a trade-at rule would almost certainly drive more trading back to the exchanges and increase their revenue. Exchange officials have traditionally argued that trading on exchanges is preferable because it is more transparent and regulated than dark pools.

Many big players in the brokerage industry and exchange operator BATS Global Markets Inc. oppose the provision.

Nasdaq and NYSE don't often collaborate, but the rise in off-exchange trading has temporarily aligned their interests, according to people familiar with the matter.

A trade-at rule provision would join the already discussed tick-size pilot program, which was originally designed to boost trading volumes for small and medium-size companies. The inclusion of trade-at now has shifted the pilot into a more encompassing attempt to remedy perceived market structure failures.

The Journal reported that the SEC hasn't indicated how the rules for a tick-size pilot program would be written, but it has asked the exchanges to come to a consensus on how it should work. Pressure is mounting after the House of Representatives passed a bill last month that would force the SEC to create optional 5-cent or 10-cent increments in the pilot program for companies whose market capitalization is under $750 million.

About 36 percent of stock trading took place off all exchanges in February, up from 10 percent a decade ago, according to research and consulting firm Tabb Group. The majority of that trading is done by large firms that match buy and sell orders from within their own inventories, while about 13 percent is traded in dark pools.

Nasdaq and NYSE have argued in private discussions with BATS and other industry participants that without the trade-at rule, off-exchange trading would continue to increase at the expense of the exchanges, and overall volumes wouldn't expand. Nasdaq is open to certain exemptions in the rules to aid institutional investors, the Journal added, citing a person familiar with the matter.

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