Be careful what you wish for. Duncan Niederauer, chief executive of NYSE Euronext, one of the largest operators of stock exchanges, called on Congress in June to “level the playing field” between exchanges and brokers’ alternative trading systems.
According to Niederauer, exchanges such as those operated by NYSE Euronext are at a disadvantage to ATSs, with which they compete, because ATSs are more lightly regulated than exchanges. Niederauer was testifying at a hearing of the House Committee on Financial Services. He argued ATSs were similar to exchanges and therefore needed to be regulated like exchanges. That would eliminate any legal advantage they held.
Dan Mathisson, head of U.S. equity trading at Credit Suisse, operator of the industry’s largest ATS, was also testifying at the hearing. Surprisingly, Mathisson agreed with Niederauer: ATSs are no different than exchanges and the playing field is not level.
Mathisson, however, argued that the advantage is not with the ATSs, but with the exchanges. He told Congress the best way to level the playing field is to eliminate the restriction that limits broker-dealer ownership in an exchange to no more than 20 percent. If that is done then most of the ATSs would become exchanges and the playing field would be level, Mathisson said.
Niederauer offered three reasons why ATSs have an advantage over exchanges. Mathisson offered four reasons why exchanges have an advantage over ATSs. The excerpts below are from their written statements as well as their oral testimony.
Mr. Niederauer
On the lengthy Securities and Exchange Commission approval process
Regulatory inequality allows ATSs to innovate quickly without SEC approval, while exchanges must undergo a rigorous and lengthy regulatory review process to initiate change. They should make our rule proposals effective on filing or subject our competitors to our elongated approval processes.
On fair access
Registered exchanges are required to have membership rules and procedures specifically designed to ensure access to exchange facilities is granted in a fair and impartial manner. The fair access requirements applicable to ATSs are far narrower. ATSs must comply with general fair access requirements only if a five percent trading volume threshold in an individual security is exceeded, and certain exceptions apply. NYX believes comparable fair access requirements should be applicable to all venues.
On the burden of market surveillance
Registered exchanges have self-regulatory responsibilities and must either maintain an extensive regulatory organization to conduct market surveillance or enter into a regulatory services agreement with another self-regulatory organization, either of which involve significant time and resources. Non-exchange trading venues are not subject to the same rules and are free from any self-regulatory requirements. We believe all market centers should share the same responsibilities and contribute to the cost of market surveillance based on their respective market shares.
Mr. Mathisson
On exchange immunity
Exchanges have absolute immunity on errors, having historically been considered quasi-governmental entities. Courts have typically ruled that exchange immunity holds even in cases of gross negligence or willful misconduct. ATSs are regular businesses that have liability for their actions. We believe that considering exchanges to be quasi-governmental entities no longer makes sense. Exchanges should not have been allowed to convert to for-profit entities six years ago while still retaining their SRO status. It is time for policy makers to correct this mistake by removing the exchanges’ status as self-regulatory organizations.
On the tape revenue monopoly
The Consolidated Tape Association has a legal monopoly on providing a consolidated stream of real-time data from our nation’s stock markets. The CTA makes a profit of approximately $400 million per year, which is then rebated to its participant exchanges based on a complex formula. The revenue that exchanges receive from these rebates is significant. For example, Nasdaq reported receiving $116 million in rebates in 2011 from the CTA. ATSs do not receive tape revenue. These plans were set up in November 1972. After 40 years, we believe the current tape revenue model is obsolete and rife with problems and we recommend a full review of the tape revenue system.
On the lack of clearing fees
Exchanges pay no clearing fees. An ATS is a party to both sides of each transaction that passes through it, while an exchange merely facilitates the transaction. Therefore ATSs pay tens of millions of dollars in clearing fees annually, whereas exchanges pay no clearing fees.
On the lack of capital requirements
Exchanges have no net capital requirements. Because they are not a party to the transactions that occur on their systems, exchanges do not need to hold capital to stand behind their trades.
