Exchanges endorse tough Europe approach to markets

By Jonathan Spicer

NEW YORK (BestGrowthStock) – Two of the world’s largest exchange operators sided on Tuesday with Europe as regulators there and in the United States each tackle the question of what role public stock markets should play in the years ahead.

The chief executives of NYSE Euronext and Nasdaq OMX Group Inc endorsed the more aggressive approach of European market regulators as they undertake a sweeping review of marketplaces and ponder changes to so-called dark pools.

The U.S. Securities and Exchange Commission is similarly considering more adjustments to the high-speed, electronic marketplace, which some see as unfair and unstable, especially in the wake of the May “flash crash.”

The executives agreed that the outcome of the twin reviews will likely play into the hands of their traditional exchanges, which have lost big chunks of market share in the last five years.

“The EU Commission is in certain ways more advanced with respect to their thinking on what is the proper role of lit markets versus dark markets. That rule set that will come out will be a positive for the lit markets,” Nasdaq OMX CEO Robert Greifeld told a Goldman Sachs-hosted conference on Tuesday.

At the center of debates on both sides of the Atlantic is whether — and how hard — regulators should crack down on dark pools, where trading is done anonymously based on the share prices displayed by the public, or “lit”, venues.

Institutional and individual investors in particular trade in dark pools and other “internalization” structures so that they can hide their intentions from the wider markets, where computerized trading has made it difficult to effectively transact large blocks of stock.

These internalizers now handle as much as 30 percent of overall U.S. stock trading, and, with other alternative venues that display prices, have put heavy pressure on exchanges like the New York Stock Exchange and London Stock Exchange.

“I genuinely believe that the European regulators feel that their interests and those of exchanges are much more aligned,” NYSE Euronext Chief Duncan Niederauer told the conference.

“In the U.S. I think the regulators — and I can’t be hypocritical, I was one of the ones 10 years ago pushing for exchanges to have competition in this country — pushed hard for there to be competition,” Niederauer said, referring to his years heading Goldman Sachs’ trading operations.

“The question is, is too much of a good thing a bad thing?”


Greifeld and Niederauer — which between them oversee dozens of venues internationally — are old rivals who have found themselves aligned against dark liquidity.

The European Union plans to crack down on bank-run dark pools to boost market transparency, and aims to create a new sub-regime for these facilities, according to a draft document.

The SEC proposed tougher rules for dark pools more than a year ago but has not enacted them. It has meanwhile adopted several changes meant to avoid a repetition of the May 6 crash, in which the Dow Jones industrial average plunged nearly 700 points in minutes before quickly rebounding.

Both regulators are also deciding what to do about so-called high-frequency trading, the rapid-fire computer-driven trading done by banks, hedge funds and others that increasingly dominates buying and selling of stocks.

The SEC is considering liquidity obligations for these traders. The EU plan could impose minimum tick sizes on high-frequency orders, and give the orders a minimum life span.

“It’s a wrong thing to try to define what is good liquidity from what is bad liquidity. The essence of the market is that everybody comes together with divergent viewpoints, and that’s what makes price discovery happen,” Greifeld said.

In the end, “I think there will be increased regulation but I don’t think there will be a ban on any type of (high-frequency) activity,” he said of the so-called markets in financial instruments directive (MiFID) review in Europe.

Looking ahead, both executives see today’s market structure reviews — which could revamp the flow of trillions of dollars in cash equities — as net positives.

“We don’t think there’s any chance that the outcome puts us in a worse position,” Niederauer said of NYSE Euronext. “At the same time … we’re not expecting the outcome to be something that dramatically improves our position.”

(Editing by Steve Orlofsky)

Exchanges endorse tough Europe approach to markets