Last updated: December 18, 2012 7:17 pm

NYSE says regulation hits retail investors

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Professional traders are benefiting at the expense of retail investors due to a combination of technological change and the rules that govern US equity markets, the New York Stock Exchange told a congressional committee on Tuesday.

The testimony from a senior executive at the bourse, which has faced competitive pressure from shifting trading volumes, amounted to a plea for regulators to revisit and simplify US market structure guidelines.

It came as congressional leaders heard from four executives from the US securities industry on Tuesday on the topic of computerised trading venues. Trading away from bourses on venues such as dark pools and broker-crossing networks has risen 50 per cent in the past three years, to account for nearly a third of total US market volume.

Trading has fragmented across multiple venues in the six years since US authorities adopted Regulation NMS, which was designed to ensure investors obtained the best available transaction price across any venue when buying and selling securities.

The fragmentation – stocks are now traded on 13 exchanges and about 50 non-exchange venues – has helped trigger a technological arms race among brokers, many of whom now transact orders at millisecond speeds.

Joseph Mecane, head of US equities at NYSE Euronext, the exchange’s parent company, said the developments in market infrastructure had created an environment where skilled traders could abuse retail investors, hurting market integrity.

Exchanges have responded to pressure from fragmentation by designing sophisticated order types, which have been criticised as a method of favouring high-frequency traders, to bring back lost trading activity.

Mr Mecane said the Securities and Exchange Commission was best suited to propose meaningful changes to market structure.

“Changes to be considered should include a review of market maker obligations, the sub-penny rule, the order protection rule, tick sizes for illiquid securities and addressing the conflicts and overlap between broker-dealers and exchanges, including the obligations and responsibility of each when providing like services.”

Among the other panellists, the head of US equity trading for Credit Suisse renewed calls for exchanges to be stripped of their self-regulatory status, citing the Facebook public offering as an example of the failures of current market structure.

Brokers are seeking to reclaim $500m in losses, which they attribute to technology glitches on Nasdaq, another leading US stock exchange, during Facebook’s IPO in May. Dan Mathisson said: “It is a dangerous situation when a for-profit enterprise can cause half a billion dollars of losses for others, and not have the risk of being held legally liable.”

Earlier this year, an SEC commissioner called for the self-regulatory framework governing the activities of exchanges to be reviewed.

A series of technology errors and trading glitches since the flash crash of May 2010 have brought into question the very rules that govern US market structure, Senator Jack Reed said at the hearing.

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