Is it better to be a broker or an exchange right now?


With trading volume at low ebb, the stakes are higher than ever for execution services. Both broker-run venues and traditional exchanges maintain, with good reasons, that the other has some huge advantages. The exchanges have argued that their SRO burdens (compared with dark pool operators) are major issues that entitle them to some changes, such as near-instant approval of rule filings, looser fair access rules for exchanges and heightened regulation of ATSs.

On the other hand, the brokers that own dark pools argue that policy makers should either strip the exchanges of their SRO status or scrap the policy that bars broker-dealers from owning more than 20 percent of an exchange. That way brokers would be more likely to convert their ATSs into exchanges and compete on equal terms.

So which one really has the advantage?

It's a hard call. Some note that several new exchanges, like BATS and Direct Edge, were once ATSs. As exchanges, they now enjoy some possible new benefits, such as less liability for technical snafus, the ability to sell market data, no clearing fees, as do broker-dealers. That exchanges in general have been able to outsource their regulatory burden to Finra suggests that they do have some advantages. But that may not be enough to outweigh ATSs main advantages, which is ability to move fast and benefit from reduced pre-execution disclosure.

So what to do?

Perhaps it is time to start from scratch and force all parties into a single box, with a common set of standards. Wouldn't this make more sense than constantly fighting the "who's disadvantaged" wars even as all the players encroach on each other's space? Exchanges have launched dark pool-like services for retail investors that attempt to marry the best of both worlds. The NYSE Retail Liquidity Platform is the best example, and Direct Edge has recently announced plans to enter this arena. At the same time, brokers would like to win exchanges status for some of their larger dark pools.

So perhaps the time for great leveling is at hand. Some regulators are coming around to this point of view. How would this be achieved? That's the big question. -Jim