Our Thoughts On Today’s Equity Market Structure Senate Banking Committee Hearing


Today, there will be another Senate Banking committee hearing on equity market structure.  While we applaud the folks in DC for trying to better understand our equity markets, these hearings seem to be just a knee jerk response to the “Flash Boys” uproar.  We fear that once the headlines subside, the folks in DC will once again forget about market structure issues until the next “event” occurs. While we are skeptical of these recent hearings, we are encouraged by some of the testimony. Today, we would like to highlight the comments of the “new” New York Stock Exchange.  In his prepared testimony, Jeff Sprecher, CEO of ICE, stated:

“There are several issues we have raised and continue to question. For example, we do not believe it is fair that some investors are permitted to trade in dark markets without either first interacting with lit markets or providing some tangible benefit to the investor such as meaningful price improvement or size improvement.  We question whether the maker-taker pricing model used by trading venues to compensate liquidity providers adds to the complexity problem and increases the appearance of conflicts of interest that brokers face in executing trades on behalf of clients.  We also have concerns about the rising level of fragmentation and believe that the increased technology cost and risks that are born from maintaining connections to as many as 60 trading centers is unnecessary and ultimately increases costs to investors. 

The lack of order competition in a fragmented market negatively impacts markets in the form of less liquidity, information leakage and wider spreads…While NMS achieved its goal of increasing competition among markets, the pendulum has swung too far at the cost of less competition among orders.

Mr. Sprecher then went on to give some concrete recommendations on how to fix our equity market including a modified trade-at, elimination of maker taker, reduction of exchange fees, fix the SIP and require more routing disclosures.

Some may say that these are just words and they doubt Mr. Sprecher and the NYSE will actually act, especially unilaterally.  But the folks at NYSE have already begun to act.  In a filing​ last month with the SEC, the “new” NYSE proposed eliminating 6 cross order types and 5 working order types.  All of these order types appeared to have been built specifically to aid a subset of the NYSE client base.  It’s obvious to us that the new owners of the exchange have come in and decided to clean up the shop. They appear to be trying to rid themselves of the prior regimes conflicted behavior.

For example, one of the order types that is being eliminated is the PL Select Order.  We highlighted this order type way back in July 2012 when we questioned ​ why would an exchange create an order type like the PL Select which is designed not to trade.  We surmised at the time that they were once again catering to the requests of their highest volume, high frequency clients.  ​We were not the only ones concerned about the PL Select order.  T Rowe Price submitted a comment letter in September 2012 expressing their concerns about this order type

We followed up this note a year later and noted that NYSE was modifying the PL Select order a bit but was not eliminating the order type.  At the time, we claimed a small victory but wished that NYSE would have just scrapped the entire order type.  Today, we’re happy to report that NYSE has finally proposed getting rid of the PL Select order.  In this SEC filing, they stated:

“Finally, the Exchange proposes to eliminate PL Select Orders, which are Passive Liquidity Orders designated as a PL Select Order to buy or sell a stated amount of a security at a specified, undisplayed price. A PL Select Order retains its standing in execution priority among Passive Liquidity Orders but does not interact with incoming orders that (1) have an IOC time in force condition, or (2) are Intermarket Sweep Orders (“ISO”). An incoming PL Select Order that is marketable will execute against all available contra-side interest without restrictions. To effect this elimination, the Exchange proposes to delete Rule7.31(h)(7).

We applaud the “new” NYSE for recognizing the mistakes of their predecessors.  Clearly, they are working hard to clean up their exchange and we wish them well.  Now, if some of those other exchanges can follow NYSE’s lead, we may actually start to get somewhere.