The Big Board's new owner says decade of change has disadvantaged the little guy.
The head of IntercontinentalExchange Inc., which is about to own the New York Stock Exchange, said U.S. equity markets are flawed because sophisticated traders are taking advantage of small investors.
A decade of regulatory and technological changes have fragmented trading across more than 50 markets and given rise to firms that use computerized algorithms to trade far faster than humans, with executions measured in less than a thousandth of a second. Also, almost 40% of volume takes place on private platforms, data compiled by Bloomberg show.
That means investors saving money to send their kids to college or to buy a home can be taken advantage of by traders who possess more information, ICE chief executive Jeff Sprecher told analysts Tuesday during a conference call.
Sophisticated firms are “incented to take advantage of the people that are the weakest on the day they have make to the trade, and I think that that is fundamentally wrong,” Mr. Sprecher said. “People that have built a business around that are ultimately destined to fail. I don't think they are sustainable and increasingly, when I go talk to friends and when I listen to people that are not involved specifically in what we do, there is a sense that things aren't fair.”
Mr. Sprecher's company expects to close its acquisition of NYSE Euronext, the biggest owner of U.S. stock exchanges, “within days,” he said. ICE is further along than expected with its plan for integrating the company, he said.
'VERY INFORMED'
“We have a very informed view of what businesses we're going to put where” and who will run the various units of the combined company, Mr. Sprecher said.
The union creates one of the world's largest bourse operators by giving ICE new markets in interest-rate futures and the New York Stock Exchange. ICE on Oct. 30 postponed the planned Nov. 4 closing date to give European regulators more time to review the transaction.
Mr. Sprecher's critique of modern equity markets comes after the New York Stock Exchange and Nasdaq OMX Group Inc. saw their dominance over U.S. equity trading eroded by a decade and a half of changes in regulations and technology.
Stock prices are now quoted in penny increments, undermining profits at market makers and forcing exchanges to turn to automated firms as their main source of liquidity. A 2007 rule change required stocks to trade on whatever venue has the best price at any given moment, helping legitimize alternative venues and furthering the fragmentation of trading.
Small investors are hurt by the new structure of markets, Mr. Sprecher said.
The current environment “that takes advantage of people that have to trade or have poorer information is not particularly warranted, or helpful, or sustainable,” he said.
NYSE can be a catalyst for change in the industry, he added. “The market model is going to change, I think people in the business wanted the change, and hopefully by being transparent about it, we will be a positive force in causing the change.”
Joseph Saluzzi, a frequent critic of modern equity markets, said he welcomes ICE's expansion beyond futures into stocks.
“I'm excited for when they come in and take over,” said Mr. Saluzzi, partner and co-head of equity trading at Themis Trading. Because of the size and influence NYSE still commands, “if they make changes, some of these other guys will go along,” he said, referring to NYSE's competitors.
BIGGEST SHARE
NYSE Euronext, which has the biggest market share, is among four major U.S. stock exchange owners along with Nasdaq, Bats Global Markets Inc. and Direct Edge Holdings. Bats and Direct Edge are merging.
Mr. Sprecher declined to identify specific changes that he plans at NYSE Euronext because the deal is still pending.
Although U.S. stocks trade on more than 50 markets, including 13 that are officially designated as exchanges, the NYSE is the only one with a trading floor where humans help facilitate trading.
“The NYSE is a very special place,” Mr. Sprecher said. During an Oct. 21 speech, he said human traders are still needed there.
“Markets need a human touch,” he said two weeks ago at the event held by the Atlanta Press Club. “What we're buying in the New York Stock Exchange is the place where everyone goes in times of trouble or times when the market is wanting real certainty,” he added. “That's the one you want to own.”
Asked Tuesday whether he would take over as the public face of the New York Stock Exchange after the acquisition is closed, Mr. Sprecher demurred.
“I don't think I'd be very good at it,” he said. “I know my own limitations. It's alluring as a manager” to consider the role, he said, adding, “I'm glad Duncan Niederauer is staying in that role,” he said, referring to the current chief executive of NYSE Euronext.
(Bloomberg News)
