Free Site Registration

Cracks in the Pillar

Traders Magazine Online News, August 7, 2018

Eric Stockland and Stan Feldman

The SEC’s Transaction Fee Pilot (“the pilot”) is about market structure reform. It is about aligning the interests of stock exchanges and brokers with investors. The path to getting there requires unwinding the monopolistic and conflicted business models of the incumbent exchanges. In the end, we hope that simplifying the overly complex and fragmented market structure reduces implementation costs for all investors.

When over 50 pension funds and institutional investors managing $8 trillion dollars[1] on behalf of millions of households voiced their universal supportfor the pilot earlier this year, the New York Stock Exchange saw the writing on the wall. Their ability to pay rebates was in jeopardy, and they needed to act. NYSE’s business model relies on paying rebates: NYSE buys market share with rebates, which helps to entice order flow to an exchange with poor execution quality.[2] In turn, market share is used to justify charging monopolistic prices[3] for market data and connectivity.

So NYSE has gone into crisis mode.

Instead of questioning the merits of the pilot?—?which would be difficult since the SEC pilot is well designed, informed by industry input, and universally supported by investors?—?NYSE decided to mislead their listed companies. In a blog post, they published a disingenuous analysis claiming the pilot would cause one billion dollars in harm to investors, ignoring the fact that every investor who has spoken out is overwhelmingly in support of the pilot.

When we challenged NYSE on their work of fiction, they wrote in a comment letter, “Our assumptions may be imperfect, but the IEX criticisms, issued without any alternative analysis, were devoid of any basis.”[4]

Let this blog serve as basis.

It is clear NYSE is trying to bait IEX into a food fight, to avoid a debate over substance. As fatigued as the industry may be with the war of words, we felt that as the only exchange supporting the pilot, IEX is in a unique position to refute NYSE’s arguments.

Flaws in the Foundation

In our view, NYSE’s model, assumptions, and conclusions suffer three fatal flaws?—?no solid foundation for a “pillar of capitalism”:

The model published by NYSE gives anyone the ability to stress-test those assumptions…which we did. After we adjusted for a range of practitioner- and fact-based parameters, their headline-grabbing number of “$1 billion in harm” evaporated, reduced by as much as 90%. Furthermore, even assuming a marginal benefit to implementation costs from reducing or banning rebates would flip the script, showing that the pilot could dramatically help investors.

Crack #1: Investors don’t add liquidity. Or do they?

If spreads widen, investors crossing the spread would incur a higher cost. But investors who add liquidity would receive additional benefit, as they capture a wider spread. That’s why identifying the correct rates of adding and removing is critical.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.