CORRECT (11/17):As Exchanges Head To Capitol Hill, Some Customers
Grow Wary
("=As Exchanges Head To Capitol Hill, Some Customers Grow Wary," published
Tuesday at 4:31 p.m. EST, misstated Christopher Nagy's title, in the seventh
paragraph. The correct version follows.)
By Jacob Bunge
Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- The two largest U.S. stock exchanges have been flexing
some political muscle on Capitol Hill in a show of strength that is causing
unease among customers and rivals alike.
NYSE Euronext (NYX), Nasdaq OMX Group Inc. (NDAQ) and their counterparts in
the futures sector have built up political capital during the credit crisis.
Their systems didn't crack, trading continued and they were a model of
transparency compared to the hedge funds and over-the-counter dealing that
attracted so much ire in Washington, D.C.
The exchanges have seized on the political climate to push agendas that would
tighten oversight of upstart competitors, strengthening ties on the Hill and
often propelling what was once market minutiae into the mainstream media in a
flurry of letters, testimony and meetings with Washington authorities.
Nasdaq OMX and NYSE Euronext declined comment for this article.
But in a political atmosphere charged with populism and general mistrust of
Wall Street, some big trading firms are worried about collateral damage.
"In their quest for market share, the exchanges, as they're battling back and
forth, have planted the seeds of doubt that there's something nefarious going on
in the marketplace," said Christopher Nagy, managing director of order routing,
sales and strategy at retail brokerage firm TD Ameritrade Holding Corp. (AMTD).
"One issue can easily flow over into other markets, and we're already seeing
signs of that happening," Nagy said.
The furor over flash orders is one example. These give some market
participants a fraction of a second to act on unfilled stock orders before the
orders are sent out to another exchange to be filled.
Debate over the practice has sucked in the high-frequency trading shops that
dominate equity and futures trading, and spilled over into options markets,
which have incorporated a similar practice for years.
After outcry from members of Congress, the Securities and Exchange Commission
moved swiftly to outlaw the practice and voted to propose a ban in September.
Nagy said a ban may harm his retail customers, who benefit from the liquidity
that high-speed proprietary traders provide, and who could get better trade
execution by "flashing" stock orders.
Executives at options exchanges, such as International Securities Exchange
Chief Executive Gary Katz, have decried rival exchanges' "politicization" of
market-structure issues that have bled into options markets, where some argue
that flash-like order routing helps customers avoid paying fees to trade on
other markets.
High-frequency traders--by some estimates accounting for two-thirds of trading
volume in the U.S. stock market and nearly as much in futures--have, meanwhile,
learned a tough lesson about public relations.
Such firms, which utilize a variety of computer-driven strategies to seek
profits across multiple markets, were caught flat-footed by the sudden scrutiny
on their activities. This prompted half-joking talk of assembling an industry
group to speak up for a business that doesn't have traditional customers or
investors to keep happy; no such body has yet been fielded.
Most high-frequency trading shops credit the exchanges, which have defended
their liquidity-providing customers, but things get more complex when it comes
to dark pools, some of which are operated by banks or brokerages that are also
major exchange customers.
Dark pools are private venues in which institutional investors can trade big
blocks of stock anonymously, helping split up large orders to ensure a better
price.
Such venues have eaten into exchanges' market share in recent years, and
executives at NYSE Euronext and Nasdaq OMX have called for tighter restrictions
on the platforms in recent months, as the SEC considers requiring dark pools to
report more of their trading activity.
A press conference focused on dark-pool reporting last month, which joined
NYSE Euronext CEO Duncan Niederauer with Sen. Charles Schumer (D-N.Y.), raised a
red flag for Leonard Amoruso, general counsel for Knight Capital Group Inc. (
NITE), a big brokerage firm that also runs the Knight Link dark pool.
"That leads you to question whether or not a senior senator in New York is
advocating one model over another," said Amoruso. "I'm certain that wasn't [
Schumer's] intent, but there are a good deal of market participants who see that
and have that reaction."
Amoruso said Knight wants a level playing field across exchanges and dark
pools that ensures good prices and tight markets for all investors.
But as exchanges have begun arguing their case more loudly in Washington,
firms such as Knight have had to step up their own efforts to ensure all sides
of the debate are being heard.
"If the data is showing that the investor experience is probably at the best
it's ever been, whether a large investor or small, then why are we advancing
changes to micro-structure of the market?" Amoruso said.
"What we're hoping, through the comment process and the SEC's subsequent
evaluation process, is that, before they propose a rule, they've done a
comprehensive study of all the data available in the market."
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com
(END) Dow Jones Newswires
11-18-091118ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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