NYSE National Creates A Stock Exchange Baker’s Dozen
NYSE has decided to reopen the National Stock Exchange which it bought last January. According to their 798 page SEC filing, the new exchange will be known as NYSE National and will begin operations in the second quarter of this year. The stock exchange landscape now consists of 13 exchanges:
The NYSE Family – NYSE, NYSE Arca, NYSE American and NYSE National
The Nasdaq Family – Nasdaq, Nasdaq BX, Nasdaq PSX
The Cboe Family – BATS, BATY, EDGX, EDGA
Chicago Stock Exchange
We looked through the 798 page regulatory filing and it appears that NYSE National will be borrowing heavily from NYSE Arca and NYSE American rules. NYSE National will not be a listing venue and they will not have any opening/closing auctions The order types listed in the filing appear to be very similar to existing NYSE Arca order types. In other words, there doesn’t appear to be anything special about the NYSE National.
We think that the NYSE National would not have gained SEC approval if they had applied to become an exchange from scratch since they are not offering any market structure improvements and do not seem to be adding any new value. But since they were purchased like an existing taxi medallion by the NYSE, they will be allowed to commence operations in the second quarter. NYSE National will allow their parent company to receive a new stream of revenue from proprietary market data feeds, port fees, colocation fees and a share of the estimated $500 million/year market data revenue pot (which is based on trades and quotes).
We’re disappointed that NYSE has continued down the path of fragmentation. We had high hopes for their new owners when they first took over the exchange in 2013. They seemed to understand that the exchange model of fragmentation, rebates and special order types was not a healthy model. A few months after the takeover of NYSE was finalized, Jeff Sprecher blasted the maker/taker model:
“I think maker-taker pricing or payment for order flow is bad for markets,” Sprecher said. “It creates false liquidity by attracting people who are there solely to try to make rebates and not actually trade and hold risk. That liquidity leaves quickly and is not subject to any contractual obligation like a market-maker would be.”
A couple months later in May 2014, Sprecher called for the elimination of some order types:
“Sprecher also argues the large number of order types makes the market excessively complicated. As a first step toward making the markets less complex, he said ICE would voluntarily reduce the number of order types at its U.S. equity exchanges. He said they have identified over one dozen existing order types that they will apply to the SEC for rule changes to eliminate, and they will continue to evaluate other order types that may not be providing any value to the market.”
Later in 2014, Sprecher and NYSE took a leadership position and proposed the “grand bargain”, where NYSE would drop their access fees to 5 mils/share and in return broker-owned dark pools would accept a trade-at rule.
This never ended up happening and, somewhere between 2014 and now, NYSE appears to have given up on their idea of market structure reform. They provided us a glimpse of this in their Q1 2017 earnings conference call when they commented about the positive effects of fragmentation for their business model:
When you split these liquidity pools, and entrants may do that and regulators may cause that, what happens is that overall volumes tend to go up because the market starts to arbitrage and tries to put the market back together, the value of data goes up. And the whole thing for us turns out to be very good business. We fight that because we don’t think it’s in the best interest of the market. We have ways of growing otherwise, but we have positioned ourselves for more fragmentation which ultimately I think leads to higher revenues and earnings for ICE.
While having four stock exchange licenses may be good for ICE, we don’t think this extra fragmentation helps long term investors.