NYSE Euronext, owner of the second- largest U.S. stock exchange, sought to mute opposition to its quest for regulatory curbs on so-called dark-pool trading by offering to lower its fees it charges to execute trades.
The proposal by NYSE Chief Operating Officer Lawrence E. Leibowitz is the latest effort by U.S. exchanges to persuading the Securities and Exchange Commission to curb activity in off- exchange dark pools, which has grown to 36 percent in March from 16 percent in 2008, according to data from Rosenblatt Securities Inc. Speaking at a roundtable panel capital market regulation in New York, Leibowitz acknowledged the access fee of 30 cents per 100 shares is “a large price.”
“Lowering that access fee in exchange for something that forced more volume to respect the public quote, I think would be exactly an appropriate trade off,” Leibowitz said at the event organized by Representative Scott Garrett, a New Jersey Republican, and other House lawmakers.
Officers of NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc. have met with SEC officials and lawmakers in recent weeks to pitch for a so-called “trade-at” rule, which would allow broker-operated dark pools to execute trades only if they offered better prices than are available on exchanges. The exchange executives have said trading in dark venues, which don’t publish bid and offer quotes, harms price discovery while offering limited price improvement to investors.
Several dark-pool operators offered support for Leibowitz’s proposal, although details of the idea weren’t fully discussed. Dan Mathisson, head of U.S. equity trading for Credit Suisse AG, said he could support a “trade-at” rule “if combined with a large decrease in the fee.”
Innovation, Competition
Today’s fragmented equity markets, which include 13 exchanges and nearly 40 dark pools, are a product of innovation, competitive pressure and SEC regulations implemented over the past 20 years.
Brokers say they execute customer trades internally or route them to a dark pool in order to avoid exchanges’ access fees, which is part of a pricing model that pays suppliers of bids and offers and charges those trading against them. Nearly all retail-customer orders never see an exchange because they are filled by wholesale market makers that pay brokerages to trade against the orders.
“They don’t like the access fees the exchanges are charging, so a lot of them are basically going to cheaper execution venues,” James J. Angel, a professor of finance at Georgetown University, told the roundtable participants.
SEC Commissioner Daniel M. Gallagher said in an interview after the event that the NYSE’s proposal appears to be “the type of thing that you consider in a holistic review.”
Garrett said the event was intended to get the SEC to consider whether its regulatory model has lagged behind changes in the industry, including how exchanges, dark pools and brokerages compete for business.
“The SEC is continually and maybe too much for some regulating in this space, little by little,” Gallagher said. “In the aggregate we are not sure what it amounts to.”