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VIEWPOINT: US Stock Markets Put Investors First

Traders Magazine Online News, October 9, 2018

Mike Ferguson

Public exchanges today offer trading and data services that are more valuable, efficient and resilient than at any time in history and at the lowest cost to investors. Recent suggestions otherwise by exchange critics are unfortunate and overlook several important realities about how our capital markets work today. 

For starters, all capital markets participants are “for profit” — investors, market makers, banks, brokers, venue operators, issuers, traders and everyone else. There is no such thing as a not-for-profit capital markets participant.

When today’s for-profit national securities exchanges were still member-owned, it was the broker members who retained the profits exchanges earned, enabling the exchanges to remain technically “not-for-profit.”

But then and today, public exchanges remain the most heavily regulated and transparent participants in our capital markets. They are required to compete with over 50 alternative trading systems, more commonly known as dark pools, which are all run by financial institutions and on which 40 percent of equities trading occurs.

In contrast to public exchanges, dark pools are subject to lighter regulation and can discriminate among customers by negotiating undisclosed fee arrangements with each of them.

This complex, fragmented market structure is a result of the Regulation National Market System (Reg NMS), not exchanges’ ownership structure. Reg NMS precipitated the need for market participants to demand greater access to information and connectivity at faster and faster speeds. 

The Securities and Exchange Commission (SEC) introduced Reg NMS with the stated goal of creating greater competition for exchanges and other trading venues at the behest of investors seeking lower costs to trade. It also promoted the use of automated trading systems at the expense of manual open outcry trading floors.

This has forced exchanges to evolve and modernize. But this also required significant systemic and technological changes. Becoming listed entities in their own right enabled exchanges to access the capital markets — like any other for-profit entity — to make the technology investments to compete and deliver the services their clients demand.

Reg NMS was successful in its goal. We now have more than 13 equities exchanges competing aggressively for both listings and trading market-share. This competition is what constrains prices for the well-funded trading firms that buy proprietary data.

The exchanges compete not only for consumers of analytical, data and index products, but for the order flow that is the very lifeblood of their existence. 

Adding to this landscape, they also compete against their own clients — large investment banks and broker dealers, who through these Reg NMS changes are even better able to act as quasi exchanges by matching the buy and sell orders received from their clients without sending them to an exchange.

In this more-fragmented market, data and access are critically important. Price discovery and trade execution are more efficient today because of public exchanges’ investments in technology, not in spite of them.

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