What is the role of an exchange?


It’s been  a few weeks now since we made any wiener schnitzel jokes about the pending NYSE/Deutsche Borse merger.  The frenzy of media coverage has come to an abrupt halt as the two companies try to consummate their marriage.  NYSE is apparently been busy shedding some assets to make the deal more palatable to the regulators. Last week, they filed a plan to sell 47.2% of their options platform to a consortium of 7 companies including Goldman Sachs and Citadel who each will get 14.95% of the options business.  Talk of a second spitter (that’s a Seinfeld reference) emerged as NASDAQ was reportedly getting ready to bid for the NYSE.  However, there has been nothing official on this and it doesn’t surprise us considering the “golden parachutes” that the NYSE executives would get if it happened More here about the golden parachutes

 At a recent exchange conference, the CEO of Liquidnet, Seth Merrin, had some sound advice for the executives that run our exchanges.  The FT quoted him as saying:

 Institutional business has grown 40 times in the last 30 years. You should focus on the reasons you were founded in the first place. Exchanges were the centre point for capital formation in the country. They were also expected to provide an efficient place for the shares to be traded…Everyone is contemplating what their next move is. Investment bankers are coming to them with ideas for different steps they can pursue…Its about understanding the nature of the competition thats coming in and how to turn the competitive drivers into real opportunities.

 Mr. Merrin hit the nail on the head.  Exchanges seem to be doing everything but focusing on capital raising.  They invent schemes like an “inverted maker/taker model” which helps stocks like Citigroup trade a billion shares a day.  They talk about changing the minimum tick to 1/10 of a penny so as to create more HFT meaningless volume.  And, they invent products like risk-tracking options which are options based on “alpha indexes”.  In case you don’t know, an alpha index “tracks the return of a single stock or ETF against a leading ETF or another single stock of the same type” Click to read more on Alpha Indexes.  All of these are creative solutions to try to raise revenue in an ultra-competitive, stagnant industry.  But the fact is that these exchanges should be thinking about more than just the bottom line.  Like Mr. Merrin said, they should be thinking about the reasons they were founded in the first place.