“It is the purpose of the Legion of Doom to align our infamous forces against the powers of good and defeat them, leaving us the rulers of the world.” – Lex Luthor

Do you remember the Legion of Doom from the 1970’s “Super Friends” animated series? The Legion was composed of 13 members that were brought together by Superman’s nemesis, Lex Luthor, to defeat the Super Friends. They would often meet deep in the swamp at the Hall of Doom to develop their plot to take over the world. Well, it looks like a new Legion of Doom is being formed and they just issued a comment letter on the SEC Market Structure proposals.

In what appears to be a preview to their official comment letters, a joint comment letter was just published by Citadel, Schwab and NYSE. The trio warned:

“We are deeply concerned that the Commission has simultaneously issued multiple far-reaching proposals that would dramatically overhaul current market structure without adequately assessing the cumulative impact on the market or the potential for unintended consequences.”

This consensus letter lacks any detailed analysis but was clearly meant to be a shot across the SEC’s bow. The letter relies on tactics that we have seen many times before from status-quo industry participants that seek to crush a proposal. These tactics include:

1. Slow it down and narrow the changes – “we recommend pursuing a deliberate process focused on identifying tailored solutions that address clearly-identified issues”
2. Call for a study of the results – “enable the Commission to evaluate expected outcomes before proposing further reforms.”
3. Threaten the loss of liquidity – “risk of negative outcomes for markets and investors, including the risk of firms retreating from being liquidity providers”

Their letter mainly focused on the Access Fees/Tick Size proposal and had these recommendations:

1. Reduce tick size to ½ penny but narrow scope to stocks with spreads of 1.1 or less
2. Set trading increment to $0.001 but no need to harmonize quoting and trading increment
3. Reduce access fees to $0.0015 for stocks with ½ penny quoting increment only. No change to 30 mil cap for non-tick constrained stocks.
4. Accelerate revised round lot definition BUT don’t disseminate odd lots on the SIP

Did you catch that little detail in point #3?

“With respect to access fees, we recommend a reduction that is proportionate to the proposed reduction in the minimum quoting increment for tick-constrained symbols. This would reduce the current $.0030/share cap to $.0015/share for the symbols with a half-penny minimum quoting increment.”

The trio wants to keep access fees at 30 mils for stocks that are not quoted in ½ pennies which essentially means that stock exchange rebates (a form of payment for order flow) would be left unchanged for most stocks. While that might be good for NYSE, how does 30 mil access fees help retail brokers access lit liquidity?

Other recommendations from the trio include:

1. Withdraw the entire retail auction proposal.
2. Withdraw the Best Execution proposal. 
3. Support 606 disclosure enhancements.

Why did NYSE have a change of heart?

With the exception of leaving the 30 mil access fee cap, all of these recommendations are market maker and retail broker friendly. We are not surprised that Citadel and Schwab are recommending them but why is the NYSE aligning forces with them? What happened to the NYSE suggestions that were published in their August 2022 paper, “Price improvement, tick harmonization & investor benefit”, where NYSE recommended $0.005 penny ticks for ALL stocks (not just tick-constrained) and harmonizing trading increments at $0.0025? Six months ago, NYSE clearly had a different attitude when they wrote:

“Harmonizing trading increments across the market can be a relatively simple change that will encourage competition in quoted prices and allow exchanges to offer better trade pricing in situations where public investors cannot compete today….trade increment harmonization could result in a material enhancement to the price improvement benefits that marketable order flow receives today.”

Quote and trade price harmonization could help bring liquidity back to exchanges but NYSE has now changed their position and no longer seems to be in favor of harmonizing trading increments. NYSE would also stand to be a beneficiary of the retail auction proposal since they would likely be one of the exchanges to run a retail auction but they want this proposal withdrawn now. It seems odd to us that NYSE would not support these stock exchange friendly issues.

What is NYSE afraid of?

In a letter published yesterday, NYSE used the standard line of defense that we have heard so often from the status quo market participants to help explain their stance: “We need to carefully implement any changes to avoid an unintended set of circumstances that may do more harm than good.”

But we wonder what is the real reason NYSE opted to sign on to this letter? Here are a few possibilities:

1. Lower access fees could threaten their auction fees – NYSE opening and closing auction fees currently range from $0.0007 to  $0.0010/share which is much cheaper than the $0.0030/share intraday access fee. Considering that approximately 30% of NYSE’s volume comes from their opening and closing auctions and the fact that NYSE gets paid on both sides of the trade, we think they might be very concerned if intraday access fees were reduced to $0.0010/share and pressure then developed to their reduce auction fees.

2. A certain big liquidity provider could possibly threaten to reduce liquidity – One leading DMM on the NYSE has boasted that they “represent 65% of all NYSE listings and have been selected by corporate issuers for more than 80% of NYSE IPOs.”

3. Overall volumes might decrease which could reduce the value of NYSE’s data related services – The major stock exchanges rely on data related services for a significant portion of their revenue.  If NYSE volume was reduced even further by the market structure proposals, could they still justify the exorbitant prices that they charge for data related services like colocation and products like proprietary data feeds?

We don’t know what NYSE was thinking but we’re surprised they chose to align their forces with other status-quo industry insiders. It must be chilly in that swamp.