By Jacob Bunge
The world's largest stock exchanges are intensifying calls for
tighter oversight of rival private trading platforms they say are
distorting global equity markets.
They want U.S. and European regulators to make so-called dark
pools--which privately match up stock trades away from public
markets--subject to the same standards as regulated exchanges.
A fresh lobbying push is being planned as NYSE Euronext (NYX)
and Nasdaq OMX Group Inc. (NDAQ) executives warned U.S. senators at
a Tuesday hearing about the rising influence of off-exchange share
trading on investors and listed companies.
The initiative is being spearheaded by the World Federation of
Exchanges, an industry lobby group that includes NYSE, Nasdaq,
Deutsche Boerse AG (DB1.XE, DBOEF) and Hong Kong Exchanges &
Clearing Ltd. (0388.HK) among its members.
"As licensed exchanges we serve the public benefit and the
public good," said Huseyin Erkan, the newly appointed chief
executive of the exchange group. "We have full responsibility over
surveillance and trading practices, whereas other trading venues
don't have that."
Mr. Erkan, who formerly headed the Istanbul Stock Exchange, has
warned that fragmentation of stock trading is hurting the basic
market function of setting fair and transparent prices, with
"serious implications for the health of the markets."
Exchange groups, themselves under fire for missteps such as the
flubbed flotation of Facebook Inc. (FB) and a series of technical
problems, have revamped the WFE and are highlighting what they see
as their central role as critical price-setters of stocks and
pipelines to investor capital.
Investors' faith in the structure of the stock market has waned
over the last two years, with one-third now expressing "very weak"
confidence in the system, according to a survey by consultancy Tabb
Group.
Mr. Erkan, who is lining up meetings with policymakers and
regulators in the U.S., U.K. and Europe over the coming months,
wants to focus attention on what he called an "unlevel playing
field" that has allowed smaller, more cheaply run competitors to
eat into exchanges' core business of matching stock trades.
Exchanges have raised alarms over such players' increasing
influence, warning that average investors suffer when a larger
chunk of trading takes place on private markets, because there are
fewer transactions setting the publicly available prices offered on
exchanges. Exchange companies also have objected to what they see
as lighter regulation for dark pool platforms, enabling such
markets to more easily compete against stock exchanges that must
invest in market supervision.
In the U.S., share-trading activity on private venues has more
than doubled over the past five years, according to data compiled
by Rosenblatt Securities Inc. Business in so-called "dark pools"
and other off-exchange venues in the U.S. peaked earlier this year
at more than 34% of all domestic stock trading, according to the
firm, and exchange officials say certain stocks now see more than
half their volume traded privately.
In Europe, the monthly value of shares traded on private venues
has risen from near zero in early 2009 to approximately EUR20
billion currently, according to data from Fidessa Group plc. The
value of shares traded on European exchanges has meanwhile dwindled
from nearly EUR1 trillion to a little over EUR500 billion over that
period.
Dark pools and similar ventures have made less headway in Asia
and the Middle East, where some exchanges still enjoy regulatory
protections against competitor trading venues.
Banks and brokers have defended their private stock markets as
necessary competitors to exchanges, which over the past decade have
converted to profit-seeking enterprises responsible for delivering
growth to shareholders. More-sophisticated off-exchange markets
have enabled big investors like mutual funds and pensions to make
large stock orders without alerting faster-moving traders that
populate exchanges, and may drive up the price of a major
transaction, according to brokers.
"You can't say that one type of venue can service all the
constituents well," said Seth Merrin, chief executive of Liquidnet,
which runs one of the world's largest alternative stock-trading
venues. Mr. Merrin said that exchanges' embrace of high-speed
trading firms has driven big investors toward private stock
markets, while raising new concerns for companies considering a
share listing.
Mr. Erkan wants to tap his member exchanges' troves of trading
data to make the case for stricter requirements for alternative
stock-trading platforms and to dispel what he said were "myths"
around the practices and influence of high-frequency trading firms,
which have drawn scrutiny around the globe.
Write to Jacob Bunge at Jacob.bunge@wsj.com
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