NYSE – The Great Fragmenter
When we first heard the news of the recent collapse of the acquisition of the Chicago Stock Exchange by a Chinese-led investor group, we started thinking about who might make a bid for the CHX. Our first thought was Nasdaq since they currently own “only” three stock exchanges (Nasdaq, BX and PSX) compared to the Cboe and NYSE who each own four stock exchanges. But according to the WSJ, our guess would have been incorrect. The Journal is reporting that NYSE is in talks to buy the Chicago Stock Exchange for $70 million which is $50 million more that the Chinese group was going to pay for the CHX. If they acquire CHX, NYSE will own five stock exchanges (NYSE, Arca, American, National and CHX) which means five colocation center fees, five proprietary data feeds, five sets of ports and five shares of tape revenue. Even if CHX market share flounders, NYSE still stands to collect millions in data related fees.
It saddens us to watch the progression of NYSE when it comes to market structure leadership. It was just a few years ago that we were championing the words of Jeff Sprecher, the CEO of NYSE’s parent company. Back then, Mr. Sprecher seemed to line up with us and other market structure reformers on approaches to fix the equity market structure problems. Particularly, in a May 2014 conference call , Mr. Sprecher addressed the problem of fragmentation:
“Many parties share responsibility for today’s market model, including incumbent exchanges like The New York Stock Exchange. Most importantly, we, in the industry, must provide the leadership to respond to needed change. And we’re encouraged by the SEC’s work and recent comments acknowledging the need to address market complexity. Years ago, the market’s reaction to a perceived lack of transparency and fairness was to create competition at the exchange level. Ultimately, this went further than most could have anticipated. And this has led to extreme fragmentation, with over 50 venues to trade the same lifted securities. While a national market system linking these venues together is a worthy goal, it has resulted in an overly complex structure with many unintended consequences. Historically, markets naturally formed up in a single venue to establish liquidity and the best price discovery. Today’s fragmentation of such standardized markets is unnatural for the ultimate end-user and it tends to be promoted by those who seek to benefit from assets to better information. With extreme fragmentation, buyers and sellers have no choice but to seek to form a single price discovery stream by employing smart order routers, algorithms and high-frequency strategies. And to maintain liquidity, you’ve seen the convergence of market makers and high-frequency trading firms with very little means to distinguish meritorious activity from that, which can be disruptive. It’s certainly a positive fact that technology and automation has tightened bid offer spreads, but the fragmentation and instability of the market today has also increased its risk and complexity.”
Mr. Sprecher was right that fragmentation increases complexity and is unnatural. But instead of taking a leadership role and seeking to aggregate liquidity, the NYSE continues to promote fragmentation and is now reportedly looking to own as many pieces of this broken puzzle as possible. Rather than embracing their goal of trying to match natural buyers and sellers without the need for a dealer, the major stock exchanges continue to drive a wedge between natural liquidity.
Update: On April 5, 2018, NYSE officially announced that they will be buying the Chicago Stock Exchange. Terms were undisclosed.