Monkey See, Monkey Do
Monkey see, monkey do. The Chicago Stock Exchange is planning on opening another stock exchange under their umbrella. What, you say you never heard of the Chicago Stock Exchange? Well, that’s because they trade less than 1% of US equity volume. When asked by Bloomberg why they were going to create another exchange, the Chicago Stock Exchange CEO said, “There’s a certain amount of cost associated with being an exchange including regulatory support and the IT structure. What we’d like is to leverage that infrastructure, technology and the regulatory arm to support a second pricing model. That’s what the other exchanges have done.” If their new exchange is approved, that would bring the number of US stock exchanges in the US to 14. Of course, as you know by now, the more destinations for the same stock, the more latency and rebate arbitrage opportunities are created. These arbitrage opportunities would not be available if it wasn’t for the fragmented equity market and its disparate pools of liquidity.
The exchange business has been in a race to zero for quite some time now. And when we say zero, we don’t mean zero time, we mean zero profitability. They have spent huge sums of money on technology ($250 million for the Mahwah data center, for example) and thought they would recover these costs with increasing volumes from HFT’s. But a strange thing happened, volume started declining as investors have lost confidence in the equity market. In order to generate new revenue, the exchanges needed to get creative and they started splitting themselves into pieces to try to create artificial volume. These sub-exchanges have been created for their own benefit and not the benefit of the market. When a quasi-utility is allowed to demutualize and become a for-profit entity, things don’t always go as planned.
We are calling on the SEC to ask the Chicago Stock Exchange to answer the following questions before they even consider approving this new exchange:
1- What value will your exchange bring to the market?
2- Other than a creative pricing plan, how do you plan to differentiate your exchange from the 13 other exchanges?
3- Do you plan on offering order types to attract “smart order routers” to your exchange?
4- Do you plan to offer a colocation service for your new exchange?
5- Will your new exchange be supplying a private data feed to its clients?
6- If yes, what information do you plan to supply in that data feed?
7- Do you have any plans to list companies on your new exchange?
8 – Will you be supplying investor relations professionals with any intelligence on their stocks?
9 – Are you applying for this new exchange because all of the other stock exchanges have multiple exchanges under their umbrella?
10- Who is currently your biggest clients and what percentage of volume do they supply to your exchange?
We think that if the SEC asks these questions, they will realize that adding another stock exchange to the fragmented mess of existing market centers would only be making things worse. In fact, the SEC should ask the other four exchange families these same questions and have them prove why the market needs all these exchanges.