Regional exchanges primed for comeback after NMS
By Jonathan Keehner
NEW YORK, Feb 27 (Reuters) - Sleepy regional exchanges could steal market share from leaders like the NYSE Group (NYX.N: Quote, Profile , Research) as U.S. equity markets brace for dramatic new rules to take effect next month.
The much-anticipated Reg NMS, enacted by the U.S. Securities and Exchange Commission to update markets for new technologies, has already altered trading by precipitating venues like the Boston Equities Exchange (BeX) - an electronic market launched last year through a venture of large brokers and the Boston Stock Exchange.
"Reg NMS breathed new life into the regional exchanges," said Keefe, Bruyette & Woods analyst Richard Herr. "Of course they gain at another's expense -- in this case likely NYSE."
The most controversial feature of Reg NMS, adopted by a split SEC decision, requires execution of automated trades at the best available price. The rule bars so-called "trade-throughs," in which orders are executed at an inferior price even if better quotes are available elsewhere.
Under the new order protection rule, automated, or "fast," markets must obtain the best accessible price. Thus, the rule opens equity trading to electronic competition and may leave exchange floor quotes vulnerable to prices generated elsewhere, analysts said.
"The biggest winners in NMS are the regional exchanges because they are guaranteed a seat at the table," said Jamie Selway, co-founder of New York brokerage White Cap Trading, adding regionals give brokers alternatives that keep market leaders NYSE and the Nasdaq Stock Market (NDAQ.O: Quote, Profile , Research) from gaining too much power.
Indeed, Citigroup (C.N: Quote, Profile , Research) and Credit Suisse (XMEZ.DE: Quote, Profile , Research), both BeX investors and top-ten NYSE brokers by volume, have also purchased equity stakes in the regional Philadelphia Stock Exchange.
Prior to Reg NMS, regional exchanges were largely ignored because they lacked enough trading volume to ensure a likely buyer for every seller, said Adam Sussman of New York consultant Tabb Group. Such volume is called liquidity.
Sussman also noted that regional exchange quotes could be traded-through.
"Now as long as it's a fast market everyone must go there," he added. "So we've seen a proliferation of brokers connecting to these exchanges and even taking ownership of them in preparation for Reg NMS."
PROTECTING ITS SHARE
But the Big Board, which last month handled its lowest-ever share of NYSE-listed trades, says trading volume at the exchange is growing and that a host of NMS-related services should help protect its share.
And of the new competition, NYSE Vice President Colin Clark points out: "It may not be that costly to create a new platform but you need captive liquidity."
Even if it continues to lose market share, NYSE should maintain market leadership with enormous liquidity, diversified products and an unmatched global footprint stretching into Europe and Asia.
In preparation for Reg NMS, the Big Board has combined floor-based trading with automated capabilities in new a hybrid market that operates alongside its online exchange NYSE Arca. Despite handling 66 percent of the trade in NYSE-listed stocks last month, down from 75 percent the prior year, the Big Board did increase its share of Nasdaq-listed stocks over January 2006.
"NYSE may be able to hold their position but there will essentially be a transfer of flow from the exchange floor and (its) hybrid (market) to Arca and others," said White Cap's Selway.
Referring to the Big Board's historical use of specialist traders, he added, "The floor is an anchor though and its going down."
Nasdaq, the top U.S. electronic exchange, is also vulnerable to new competitors, said Tabb Group's Sussman, pointing to a heated rivalry with latest upstart venue BATS Trading, which recently traded over 10 percent of daily volume in Nasdaq-listed securities.
"In some ways Nasdaq has more to lose because they compete more directly with the automated, low-cost venues," Sussman said. "NYSE has a stronger brand and reputation which may put it above the chatter from electronic markets."
Options exchanges like International Securities Exchange (ISE.N: Quote, Profile , Research) are also joining the fray. ISE recently launched a stock exchange and Chicago Board Options Exchange, the largest U.S. options exchange, expects to launch another.
A proven exchange like ISE could also take share from the market leaders although whether it can provide prospective traders with sufficient liquidity may be an issue.
"So far there is some saber-rattling from options exchanges but they lack support from the large brokerages that some regionals enjoy," KBW's Herr said. |
