Chris Nagy heads order strategy and government relations for retail giant TD Ameritrade. He informed Traders Magazine of some of the potential risks for retail investors in the Deutsche Boerse-New York Stock Exchange merger.
On rules-based versus principles-based protections–
From the regulatory standpoint, it’s something that is a little scary. Pure retail interests are so strong in the U.S. because there are so many rules-based protections. When you start venturing outside the U.S., you find that the rules tend to be a lot more principles-based. And the interests of retail aren’t necessarily represented very well. Here in the states, best execution is grounded in rules and fiduciary responsibility. If you look at Europe, it’s principles-based, kind of grounded in MiFID. There are stark differences in how those rules work. And if you look at the trading interests, you don’t have a whole lot of retail trading interests in Europe. Our market is so transparent, so efficient, the way it operates today. And I’m not saying principles-based rules are wrong. But we’ve built a great capital market structure, where retail is very engaged in the markets here. So, I wouldn’t want to see anything happen that would erode that in the marketplace. And Europe hasn’t proven to the world that they’ve got a lot of retail interests in their markets.
On complications with MiFID–
MiFID has rules on trading. But the structure and the trading environment is nothing like how the U.S. operates. They don’t have any trade-through rules there. MiFID makes it all that much more complicated, especially when you look at the sheer amount of regulatory filings. On a given day, there are 10 different Securities and Exchange Commission filings from the exchanges. Five years ago, there would have been 10 a month. Now you have to multiply that by all the [the number of] international exchanges, as they become interconnected.
On the Deutsche Boerse’s clearing operations–
But one of the things that hasn’t really been talked about a whole lot is that 45 percent of Deutsche Boerse’s revenues comes from its clearing operation. So, I would speculate that what you’ll see happen is DB clearing applying to be a U.S. clearing agent, and essentially forcing everyone to use that clearing piece as a competitor to the DTCC. In a lot of ways, it starts to give them vertical control, like you see in the futures markets. And when you’ve got ultimate front-to-back processing capabilities, that changes the paradigm a little bit. So, if you look at the transactions costs in the futures markets, compared with the equities markets, there is no comparison–costs are 200 to 300 percent higher. What it spells for the retail consumer is that initially, yes, you’ll see some price compression. But long term, I think it spells higher prices for retail consumers. The cost to clear could increase significantly if DB chose to push their clearing operations onto the NYSE. Essentially, they would have the ability to force you to go to their clearing. Today, NYSE uses DTCC, which is kind of an industry-owned consortium. It creates a lot of potential issues. If you have a disaster between two major agencies, how is that clearing process going to work? Ultimately, if they garner the volume, then you’re forced to go to them.
On regulating a decentralized giant–
If you’ve got a DB clearing organization with their technology centered here, and the company incorporated in the Netherlands, then who regulates what? It’s not just today. It’s the products of tomorrow. It’s the processes of tomorrow. So, does this mean the SEC has to go to the Netherlands to do their audits? How’s that going to work? And who’s really going to have the power and the control to dictate to the agency how exactly it’s supposed to operate? And where are the interests of the retail investor in this case?
Editor Michael Scotti contributed to the story
