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Ivy Schmerken
Ivy Schmerken
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Can Brokers Level the Playing Field As Exchange Operators?

Credit Suisse reportedly has a plan to turn one of its trading venues into a stock exchange, which points to a budding rivalry between brokers and for-profit exchanges.

If you think there are too many U.S. stock exchanges operating, then think again. Credit Suisse is looking to step into the stock exchange business.

According to a report in The Wall Street Journal, the Swiss-owned broker-dealer has a plan to turn one of its stock trading venues, Light Pool, into a full-fledge registered stock exchange.

Daniel Mathisson, Credit Suisse's U.S. stock-trading chief, has held preliminary talks with federal securities regulators and policy consultants, according to people involved in the discussions. Mr. Mathisson and other bank executives confirmed the talks.

The Swiss bank's plan centers on a trading platform called Light Pool, started last year. Light Pool is small, handling just a fraction of 1% of average U.S. daily stock-trading volume.

While this may seem unusual, brokers like Credit Suisse already operate their own liquidity venues or dark pools. Credit Suisse's electronic trading division, Advanced Execution Services (AES) operates CrossFinder, the largest dark pool for trading U.S. stocks. If Light Pool were to become an exchange, then it would go head-to-head with the New York Stock Exchange and the Nasdaq Stock Market.

The move raises all sorts of questions, such as who is better qualified to run stock exchanges and whether the competition between brokers and exchanges has gotten out of hand. Brokers are customers of the exchanges since they buy and sell securities for their own accounts and on behalf of retail and institutional customers.

Hence, they pay transaction fees to exchanges and they also purchase market data feeds sold by the exchanges. But as brokers have created dark pools, a move that has captured order flow away from the public exchanges and eaten into their share of volume, the exchanges have come to view them as competitors. While the dark pools can match trades without displaying bids and offers, exchanges publish quotes for public dissemination which entails costs.Yet the exchanges are also regulators who oversee the brokers.

Credit Suisse executives aim to test long-held views by regulators about who can control prominent securities-trading platforms, and how exchanges supervise and police themselves. Exchanges have evolved from member-owned entities into profit-driven companies with sprawling international operations. This transformation has raised questions about how they balance their roles as competitor and regulator.

"There's a rivalry going on, but they [exchanges] get to regulate their rivals," Credit Suisse's Mathisson told the Wall Street Journal.

If Credit Suisse were able to persuade the SEC to allow it to convert Light Pool into a stock exchange, this would bring the number of lit venues to fourteen, up from thirteen. But as the WSJ reports, there is a restriction on brokers owning up to 20% of a trading venue, so this would be a hurdle to overcome.

On the other hand, given the complexity of the market structure which has become controversial, some analysts have recently called for a reduction in the number of new trading venues. In September, Larry Tabb, founder and CEO of Tabb Group, in written testimony, advised the SEC to start defragmenting the market and to immediately cease granting new exchange and ATS licenses.

On the other hand, the idea of brokers operating stock exchanges could be a new trend to level the playing field. Brokers could argue that they are meeting the needs of the retail investors and the traditional institutional investors, whereas exchanges are more interested in profiting from selling data to high frequency traders.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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