For years now, the NYSE and NASDAQ have battled each other like the Hatfields and the McCoy’s.  They used to feud about which model was better – the specialist, auction system or the competing market maker system.  Now that Reg NMS has made that argument a moot point, there really is not much difference between the exchange models.

No longer able to fight each other, the NYSE and NASDAQ have teamed up to fight a new enemy – the dark pools.  Last month, along with the BATS exchange, they went before the SEC to give a US market structure update .  Noticeably absent from this meeting was the Direct Edge stock exchange.  At first, we thought they were missing  because they are an irrelevant player in the debate.  But then we thought about their ownership structure (Goldman, Citadel and Knight own 19.9% each of Direct Edge).  Some of those owners also operate their own dark pools which were the main target of the presentation.

In their SEC meeting, the exchanges noted that the number of securities with greater than 40% “TRF” (or dark pool) share has more than doubled in the past year to over 49% of total stocks.  They stated that this high TRF market share created a worse US market quality. They complained about the dark pool IOI (indication of interest) structure and how it uses a selective approach.  They concluded with a plea for the SEC to introduce a “trade at rule” similar to what Canada recently enacted.

We were very impressed with the Hatfield’s and McCoys.  They finally figured out that their business model is not sustainable and that it was better to join forces than to keep fighting each other.  They actually submitted a well thought out argument and presented a solution which would benefit the entire market, not just their HFT clients.   But we also wondered how long this kumbaya thing would last.

Well, not even a month since their SEC sit-down and it looks like they are already disagreeing again.  The latest rift comes on the issue of small (or emerging growth) companies being able to trade only on the exchange where they were originally listed.  Bob Greifeld seems to have had an epiphany and realized that fragmentation isn’t all that it was cracked up to be.   Dow Jones quoted him as saying:

“Smaller companies should [be able to] opt into a trading regime that is less fragmented,” …Greifeld said regulators should go further, allowing an “emerging growth” company as defined by last year’s Jobs Act to determine a span of time after its flotation during which the stock would be traded solely on the exchange where it is listed.  That makes newly listed, small-cap stocks more expensive to trade, Greifeld said, because liquidity is stretched out across many different venues instead of being concentrated on one. 

The NYSE doesn’t see it exactly the same way.  Bloomberg quoted Duncan Niederauer as saying:

“The U.S. Securities and Exchange Commission shouldn’t encourage the creation of a separate stock exchange for small public companies, the head of NYSE Euronext (NYX) told an SEC advisory committee today.”

Call us cynical, but we’ll wait to see some real changes before declaring the Hatfields and McCoy feud over.  Based on their past shenanigans and quest for bottom line profits, we just don’t feel that we can trust the exchanges to ask for market structure changes that would benefit all investors.  But heck, at least they are talking.