Speed Bumps, Quad ETF’s and Closing Orders, Oh My!
There are three breaking market structure news items, all involving the NYSE, that we would like to comment on today:
1) The SEC has approved NYSE’s speed bump for its NYSE MKT exchange. The Commission stated:
“The Commission believes the Exchange has sufficiently demonstrated that the proposed rule change is consistent with the Act, and the Commission does not find any legal basis to distinguish the Exchange’s proposed Delay Mechanism from the IEX access delay. In particular, the Commission believes that the Exchange has sufficiently demonstrated that its proposal would not be unfairly discriminatory.”
Our Take: We’re not surprised that the SEC decided to approve NYSE’s speed bump. Back on February 15th, we wrote: “Based on our reading of these specs, we would anticipate that the SEC will approve the NYSE MKT delay mechanism since it is not discriminatory and adheres to the 1 millisecond de minimis guidance that the SEC published after their approval of the IEX speed bump.” That is pretty much what the SEC said in their approval filing. Of course, copying IEX’s speed bump doesn’t mean the NYSE MKT exchange is just like IEX. In fact, we find it very inconsistent and disingenuous that an exchange which still sells colocation and private data feeds and has used market structure flaws to their advantage is even mentioned in the same breath as IEX.
2) The WSJ is reporting that the SEC will reconsider its approval of the ForceShares Daily 4X US Market Futures Long Fund and Short Fund (aka the “4x ETF”). Apparently, the SEC staff gave the approval for the 4x ETF without the SEC commissioners input. According to the WSJ:
“ForceShares’ application could have escaped the attention of commissioners before its approval because the SEC staff has the authority to make some decisions on its own. SEC commissioners can move to review those decisions, including the approval of new products. The review requires the SEC to consider a new round of comments from the public, which means the application may get more notice this time.”
Our Take: Even though there were no comment letters written on the 4x ETF proposal, the public outrage after the product was approved seems to have gotten the SEC’s attention. We know for a fact that our piece titled “Introducing the 4x ETF” (which was written on Jan 6th – before the SEC approval) received a significant amount of attention and was circulated on numerous blogs including ZeroHedge. We also received numerous calls from the media asking for further details on our piece which highlighted the risk factors in the 4x ETF filing. We’re happy that our piece might have helped wake up some senior officials at the SEC to the possible dangers of this very risky instrument.
3) NYSE released a letter where they chastised BATS for proposing a new market on close order. NYSE wrote:
“The proposed order type will harm one of the most relied-upon aspects of modern market structure, the closing auction, and it is clear that the company’s motivation is not to improve market quality, but to capture market share by diverting orders away from the U.S. primary listings venues. The primary venues provide the daily price discovery mechanism underpinning public company equity closing pricing.”
Our Take: This is going to shape up to be quite a battle. We expect that Nasdaq will soon chime in with their own letter against the BATS market on close order. We wrote about the BATS proposal last week in a piece titled “The Next Degree of Fragmentation” where we had lots of questions of our own about the BATS proposal. We’ll dig more into the NYSE letter in a future note. But for now, we’re going to sit back, relax and grab some popcorn as we watch the exchanges go at each other.