NYSE Euronext and Nasdaq OMX see trouble ahead if the Securities and Exchange Commission approves the BATS Exchange application. Swift approval could encourage others to follow in BATS’s footsteps, potentially creating an unnecessary surplus of stock exchanges in the U.S., exchange officials fret.
A relatively quick approval process for BATS “drops the barrier [for] competition,” said Larry Leibowitz, head of U.S. execution and global technology at NYSE Euronext, in a panel discussion at the Security Traders Association of New York annual meeting last week. That approval, he added, could herald additional exchange applications.
BATS applied for exchange status in November, and the SEC published the proposal in February. The 45-day public comment period ended on April 7 with no protests or criticism. Exchange approval is considered by many essentially a done deal. BATS’s chief executive Joe Ratterman recently told customers BATS would work in the coming weeks on final production requirements, connecting to the industry market data plans, and putting the finishing touches on its regulatory framework. BATS, the ECN, in March accounted for 8.6 percent of matched NMS volume.
Direct Edge ECN, which has less than half the average daily matched volume of BATS, has already said it plans to apply to the SEC for two exchange licenses. It also said it chose this route because of the relatively smooth regulatory process BATS has faced so far.
“The SEC may be faced with: Is there a good or right number of exchanges?” NYSE Euronext’s Leibowitz said. He added that there are a “number of exchanges out there [currently] that just don’t matter from a materiality standpoint.”
The anticipated approval of BATS Exchange also alters the value of owning an exchange medallion. If BATS gets approved quickly, “I have to rethink what I paid for the Boston Stock Exchange,” quipped Chris Concannon, executive vice president for transaction services at Nasdaq, on the same STANY panel. Nasdaq last fall bought the BSE, which had negligible equities market share, for $61 million, and the Philadelphia Stock Exchange, which had significant options volume as well as a futures business and clearing facility, for $652 million. Both acquisitions are still awaiting SEC approval.
In recent years, the SEC has taken a long time to approve new exchange applications. The International Securities Exchange spent four years going down that road, while Nasdaq’s application, which was more complicated because NASD, at the time, was intimately sewn into Nasdaq’s corporate structure, took more than five years to get through the SEC.
The possibility that a firm could get dual SRO licenses, as Direct Edge hopes, also raised hackles. “We might go in for a couple of filings ourselves,” Concannon said. “If it’s that easy, we’ll take five.” Nasdaq plans to re-launch the Boston market, now known as Nasdaq BX, in June. That market will offer customers different pricing than the Nasdaq exchange does. Nasdaq so far has not said whether or how it might use the Philly’s license in equities.
According to Joseph Rizzello, CEO of the National Stock Exchange, having separate licenses allows an exchange group to offer multiple pricing structures. That enables them to compete with dark pools or other markets that appeal to certain segments of the trading community, he said. An exchange can have only one pricing model in its market.
Andrew Brenner, head of the ISE Stock Exchange, which launched in late 2006, also criticized the easier path new entrants may face in becoming exchanges. “More medallions, more models–at some point, it does become inefficient,” Brenner said. He added that there’s also a technology cost for new exchanges to join the securities information processors that collect and disseminate quote and trade data to vendors and others.
