Glass Exchange Houses


“I had this perception that the market for trading stocks in the United States was somewhat broken and that the market was looking for a solution.” – Jeff Sprecher, Chairman and CEO, Intercontinental Exchange, 3/12/15

There’s that “broken” word again.  We keep hearing more and more senior industry executives refer to the stock and now bond markets as “broken”.  We’re kind of flattered that folks are finally catching on to what we have seen for years and wrote about in our 2012 book “Broken Markets”​ .

We pulled the above Jeff Sprecher quote from an interview that he did with former SEC Chairman Arthur Levitt this past weekend on Bloomberg Radio.  In the interview, Jeff lays out his case for market structure reform in a simple yet convincing manner.  Even Arthur Levitt, who we blame for allowing our market to morph into a fragmented, conflicted maze, seemed to be impressed by Jeff’s comments.  Here are a few highlights of the 30 minute long interview​ :

Sprecher on talks he had with Nasdaq about possible merger with NYSE:

“I had this perception that the market for trading stocks in the United States was somewhat broken and that the market was looking for a solution.”

“The markets today are very fragmented and I thought that if we tried to bring two major exchanges together it would be helpful.”

“We had one or two meetings with government regulators and they told us we were dreaming…so we abandoned that effort.”

On the future of the NYSE: (8 minute mark)

I’m trying to bring the stock exchange back to that level..where we really play an important role in global capitalism.”

On the Knight Capital debacle:

Jeff Sprecher was about to explain what happened during the Knight algo debacle and Arthur Levitt chimed in “I’m an advisor to Knight Capital and I know the problem.”

Levitt asks why do we need two listings venues.  Sprecher says “the market likes the competition

On complexity and the number of stock exchanges: (15:30 minute)

Sprecher says he thinks there are too many stock exchanges in the US.  One of the easiest things to do is to match a buyer and seller who want to trade a stock but:

“When you fragment that and you create too many venues, you’re creating competition for the intermediary but you’re not really competing for the two buyers and sellers to get the best price and they may not find each other in that complexity.”

“A lot of that has been caused by regulation that has tried to foster competition for exchanges..but I think the pendulum has swung too far and we’re no longer thinking about the individual investor in a way that we used to.  Fragmentation makes it difficult to find the best price.”

On dark pools:

Today, the trades that are done on dark pools are actually smaller than those done on the public exchanges.  In a way, they (dark pools) have lost their function and have lost their way.”

On the Grand Bargain:

Number one is just getting the fiduciary responsibilities right.  Beyond that, incentives for the intermediaries need to be aligned so that the interests of the investor and the issuing company are paramount.  That sounds simple…but there is a lot of misalignment of incentives right now and I’m trying to convince people we ought to realign them.”

“The exchanges themselves have to change.”

On Systemic Risk:

Arthur Levitt:  “Hasn’t the complexity of regulation and the new products made us more vulnerable to breakdowns?”

Sprecher: “Definitely. A few years ago we had the Flash Crash and we still don’t know why…we really don’t know how all the systems interplay with each other.  We’re all connected to each other but we really don’t fully understand what can happen on this spaghetti of pipes that we have.”

Jeff and the folks at NYSE are trying to fix our stock market but they seem to be running into the solid brick wall of the status quo crowd at every turn.   The NYSE is caught in a tough spot – while they want to fix the market, they are having trouble throwing stones since they live in a glass house.  That house continues to offer things like conflicted order types, proprietary data feeds and premium colocation services.  The NYSE is an arms merchant that wants to end the war but it’s a war that keeps returning profits to their shareholders.

Jeff says in the interview that the “exchanges themselves have to change”.  We agree and believe that many of the conflicts of interests in the stock market were created by the stock exchanges with SEC approval at the request of some industry participants.  If the NYSE is really serious about reform, then they are going to have to take the first step unilaterally and this will certainly cost them financially.  It’s certainly going to be tough to throw that first stone.