April 2, Sent via to

Size: px

Start display at page:

Download "April 2, Sent via to"

Jean Owen
6 years ago
Views:

1 April 2, 2013 Sent via to Ms. Dawn L. Ratliff, Chief Clerk U.S. Senate Committee on Banking, Housing, and Urban Affairs Washington DC, Dear Ms. Ratliff: Credit Suisse appreciated the opportunity to participate in the December 18, 2012 subcommittee hearing entitled After the hearing, we received follow-up questions from the subcommittee and we submitted a written response on January 30, On March 12, 2013, NYSE Euronext published their response letter to the subcommittee, to which they appended a section to clarify the record on some of the representations and data provided by the Credit Suisse witness. We believe their letter is full of flawed logic, misrepresentations, and inaccurate depictions, which we address point by point in the attached addendum to our January 30 th letter. Sincerely, Daniel Mathisson Managing Director and Head of U.S. Equity Trading

On March 12, 2013, NYSE Euronext published a letter to clarify the record on some of the representations and data provided by the Credit Suisse witness.

2 On March 12, 2013, NYSE Euronext published a letter to clarify the record on some of the representations and data provided by the Credit Suisse witness. 1 Their letter is full of flawed logic, misrepresentations, and inaccurate depictions. Below we address each point raised by NYSE Euronext. Point 1 Levels of off exchange trading In our December 18 th testimony, we asserted that the Over the past five years, volume has not shifted to off exchange venues, and we included data that supports this statement (see Figure 1 below). Figure 1: % of U.S. Equity Volume Executed On Exchanges, Jan Nov 2012 Source data: NYSE TAQ Database NYSE Euronext wrote that they strongly disagree with this statement. To our knowledge, NYSE Euronext does not dispute Credit Suisse s data in Figure 1, which is taken from the NYSE s own TAQ ( Trade and Quote ) database. Instead, NYSE Euronext takes issue with the Credit Suisse definition of on exchange vs. off exchange, which they said was misleading and narrowly-focused. To add clarity, Credit Suisse defined the terms as follows: Exchange : A market center registered with the SEC as an exchange under the Exchange Act of On exchange trading : Trading that occurs on an exchange. Off exchange trading : Trading that does not occur on an exchange. 1 NYSE Euronext Response to Questions for Mr. Joe Mecane, Executive Vice President and Head of U.S. Equities, NYSE Euronext from the Record, Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment,, December 18,

3 While we thought on exchange vs. off exchange were clear and unambiguous terms, NYSE Euronext argues that it is misleading to not count certain off exchange trading as on exchange trading. In particular, they say that trading done on Alternative Trading Systems (ATSs) that primarily display bids and offers should be counted as though it were done on exchange, because these ATSs operate in a way that is very similar to exchanges. 2 NYSE Euronext is surprisingly arguing that trading on exchange does not mean the simple and obvious definition of trading done on an entity that is registered as an exchange. They apparently consider the markedly different regulatory schemes, SRO (Self-Regulatory Organization) status, and economic and legal differences of exchanges vs. ATSs to be irrelevant. They argue that instead the key factor that should designate exchange-ness is whether a market center s quotes are publicly displayed or not. But there is a significant flaw in their logic. If we follow NYSE Euronext s suggested methodology and decide whether trading is on exchange or off exchange based on whether or not bids or offers are displayed publicly, then a significant portion of NYSE Euronext s volume needs to be backed out of the exchange side of the ledger. As is well-known within the industry, but poorly understood by the investing public, NYSE Euronext operates large exchange dark pools within both their NYSE Arca exchange and their NYSE exchange. The amount of volume NYSE Euronext trades in the dark is not publicly disclosed, but there are clues. In 2008, NYSE Euronext ran an advertisement (See Figure 2 on next page) that proudly announced, NYSE Arca trades over 500 million shares of dark liquidity, daily. 3 The fine print says the over 500 million shares is based on their average dark volume from March 2008 through August NYSE Arca s average daily volume for that period was 1.34 billion shares per day, 4 meaning that according to their own numbers, more than 37.3% of NYSE Arca volume was dark over the six month sample. NYSE Euronext has not published equivalent numbers for , but we suggest they disclose the methodology used to calculate the 500 million share number in 2008, and also disclose their dark volume today using the same methodology. NYSE Euronext also boasts of its significant dark volume on the NYSE itself. In an advertising supplement to Traders Magazine aimed at the professional trading community, NYSE Euronext wrote, The NYSE has long been the deepest pool of dark liquidity in fact, on average over 200 million shares of dark liquidity trade every day on the NYSE. 5 (See Figure 2 on next page.) Since 2007, the NYSE has offered dark order types that allow an investor to bid or offer for stock without publicly displaying their bid or offer. They also trade a very substantial percentage of their volume in a dark order type known in the industry as an iceberg order, where the buyer publicly displays a small bid or offer, with much larger size sitting in the dark. 2 NYSE Euronext Response to Questions for Mr. Joe Mecane, Executive Vice President and Head of U.S. Equities, NYSE Euronext from the Record, Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment,, December 18, See NYSE Euronext website at (as of April 2, 2013). The text further states, We make other dark pools look like puddles. 4 NYSE TAQ database 5 A Supplement to Traders Magazine, available on NYSE Euronext s website as of April 2, 2013 at 2

Figure 2: NYSE Euronext advertisements emphasizing their large exchange dark pools.

NYSE Euronext defines on exchange trading as an odd hybrid of the two: light exchange volume + dark exchange volume + light ATS volume. We define on exchange trading as trading done on an exchange.

displayed volume. NYSE Euronext consistently falsely portrays exchange trading in this manner.

4 Figure 2: NYSE Euronext advertisements emphasizing their large exchange dark pools. 6 7 We believe there are at least two ways to classify trading that may be relevant to a discussion on equity market structure: on exchange vs. off exchange, and light vs. dark. NYSE Euronext defines on exchange trading as an odd hybrid of the two: light exchange volume + dark exchange volume + light ATS volume. We define on exchange trading as trading done on an exchange. NYSE Euronext is shockingly hypocritical to call Credit Suisse misleading on our common sense definition, while their definition falsely seeks to portray exchange volume as being synonymous with displayed volume. NYSE Euronext consistently falsely portrays exchange trading in this manner. In a July 2012 Op-ed piece in the Financial Times, the CEO of NYSE Euronext wrote, On one tier, open public exchanges provide full price transparency On the other tier are dark pools and other non-exchange venues that match anonymous buyers and sellers without displaying prices publicly. 8 The Op-ed contained no mention of the fact 6 Ad available on NYSE Euronext website as of March 18, 2013 at 7 A Supplement to Traders Magazine, available on NYSE Euronext s website as of April 2, 2013 at 8 Financial Times, July 4, 2012, It s time to bring dark pools into the daylight, by Duncan Niederauer. 3

5 that a significant portion of exchange volume is actually dark, or that off exchange volume may be publicly displayed. After reviewing NYSE Euronext s criticisms, we stand by our common sense definition of on exchange trading. We re-assert that on exchange trading did not significantly decline from 2008 through 2012, but rather volume just shifted from older exchanges to newer ones. Point 2 SRO Immunity In our December 18 th testimony, we asserted that courts have traditionally afforded exchanges absolute immunity from civil liability for damages arising in connection with their regulatory operations, and gave the following opinion: It is a dangerous situation when a for-profit enterprise can cause half a billion dollars of losses for others, and not have the risk of being held legally liable. NYSE Euronext said in their letter that these and related statements regarding their immunity from liability were flatly inaccurate. 9 The next sentence in their response letter states, Exchanges do have immunity from private lawsuits for damages when engaging in conduct consistent with the quasi-governmental powers delegated to them pursuant to the Exchange Act, [emphasis added] which agrees with our testimony. To explain why they are making the serious accusation of calling our testimony flatly inaccurate, they point out that although they have immunity from lawsuits, they may still be fined by the SEC for their conduct. The NYSE was in fact fined for the first time in September 2012 for engaging in market data practices deemed unfair by the regulator, but it is hard to see how this makes our testimony inaccurate. Credit Suisse never stated that exchanges have no consequences for their poor decisions or negligent actions - we stated that courts typically afford them immunity from civil liability damages. If one of the firms harmed by the unfair market data practices that led to the September 2012 fine sued NYSE Euronext to collect damages, the exchange would likely claim immunity, and based on legal precedent, would likely be successful in getting the case dismissed. To substantiate this assertion in the testimony, we cited several cases in our written testimony where courts dismissed liabilities against exchanges on the basis of immunity. 10 After reviewing our written testimony again, we stand by its accuracy. We assert again that it is inherently dangerous to have a structure where aggressive for-profit companies have immunity from civil liability. Point 3 Tape Revenue for Consolidated Market Data In our December 18 th testimony, we suggested that the Market Data system was ripe for reform. We wrote in summary: The CTA plans [Consolidated Tape Association] collect over $400 million a year from the investing public, most of which then gets rebated to the for-profit exchanges that collectively run the plans. Forty years after these plans were established we believe the 9 NYSE Euronext Response to Questions for Mr. Joe Mecane, Executive Vice President and Head of U.S. Equities, NYSE Euronext from the Record, Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment,, December 18, See, e.g., Barbara v. NYSE, 99 F.3d 49 (2d Cir. 1996); DL Capital Group, LLC v. Nasdaq Stock Market, Inc., 409 F.3d 93 (2d Cir. 2005). 4

6 tape revenue model is obsolete. In the current system, the investing public overpays for market data, and the exchanges receive a government-granted windfall. NYSE Euronext pointed out several minor clarifications to our testimony. The most significant clarification was that an estimated $50 to $60 million of this $400 million pot is rebated annually to ATSs and broker-dealers. Therefore, exchanges only retain approximately 85% of the tape revenue pot and not 100% as we implied in our testimony. The confusion around how tape revenue is disbursed reveals the need for there to be systematic transparency to the public into the CTA s finances. As of today, any estimate of tape revenue or understanding of the CTA s finances can only be gleaned after an Easter egg hunt through numerous disclosures from the exchanges and their parent companies. If the CTA s finances were transparent and released to the public on a regular basis, including the exact amounts received and rebated by the exchange-operated TRFs (Trade Reporting Facilities), we would be able to have accurate numbers to frame this discussion. We stand by our overall argument as stated in our testimony, Market data revenue has become a government-granted windfall at the expense of the investing public. We do not believe it makes sense to fund for-profit companies in this manner. And in addition to the call for a comprehensive review of tape revenue noted in our testimony, we add a recommendation that policy-makers shed some light on the numbers above by mandating disclosure of the CTA s finances. Next, NYSE Euronext stated, Mr. Mathisson and Credit Suisse seem to argue that any economic incentives associated with the fulfillment of these important obligations should be allocated to the brokerdealers and investment banks There is no footnote or reference in their letter for this inaccurate conjecture. To add clarity, we emphatically do not want to see the $400 million of tape revenue profit disbursed to the broker-dealer community or to investment banks. We would like to instead see the unnecessarily high cost of market data discounted significantly, which would reduce expenses for mutual funds, pension funds, and the investing public. In closing, Credit Suisse reiterates our previous call for a holistic review of the U.S. market structure, including the costs and benefits to investors of for-profit SROs, as well as an examination of whether the various subsidies the for-profit exchanges receive still make sense. Despite our differences of opinion with NYSE Euronext that are outlined in this letter, we wish them good luck in their merger with the Intercontinental Exchange, and we look forward to working with them and other market participants to make the U.S. markets the best they can be. 5

Equity Market Structure Advisory Committee Recommendation for Access Fee Pilot, File No

By E-mail and FedEx Honorable Jay Clayton Chairman U.S. Securities and Exchange Commission 100 F. Street NE Washington, D.C. 20549 Re: Equity Market Structure Advisory Committee Recommendation for Access