Dual Price Discovery

In the U.S., electronically linked, competitive markets are seen as beneficial for investors intraday. But some view the opening as a different matter. “I’ve never been one to say fragmentation is a bad thing,” says NYSE Euronext’s Larry Leibowitz. “The open and close are the exception. It’s hard to make the argument that two auctions is the right answer.” Indeed, Leibowitz says it’s the wrong answer: “Customers can’t be in both, whereas in the market during the day, they can be represented in one spot and know the market can’t trade through them because [the exchanges] are electronically linked.” TD Ameritrade’s Chris Nagy emphasizes a different Reg NMS-related point. He says Reg NMS made the case that competitionrather than where a stock is listedshould dictate how a stock trades. “Previously there was no competition at the opening and now there is,” Nagy says. In his view, Ameritrade’s retail customers now have more opportunities to analyze pricing around the market open and can make better-informed decisions. The regulators are watching what happens. The Securities and Exchange Commission’s Erik Sirri, director of the Division of Trading and Markets (the renamed Division of Market Regulation), sees competition at the open as an opportunity to get names opened earlier, which is good for the market. “Exchanges have an incentive to improve,” he says of both specialist systems and automated auction markets. For the SEC, the key issue is the impact competition at the open may have on market quality. Sirri notes that each exchange could work out “where the price could be” for any given security at the opening. “If, as a result, there’s a problem with the quality of the market,” he says, “we’d have something to say about that. If the opening price is consistently biased, we might have a concern.” Sirri adds that brokers, with their duty of best execution, also wouldn’t want to route to a market that provided inefficient prices. UNX’s Michael Rosen adds that two opening prices probably couldn’t be sustained for long if the smaller market built liquidity. “Once that price is published, off goes trading and the market will move to an electronic mode where people can see the top of the book and make their trading decisions,” he says. N.M. * the U.S., electronically linked, competitive markets are seen as beneficial for investors intraday. But some view the opening as a different matter. “I’ve never been one to say fragmentation is a bad thing,” says NYSE Euronext’s Larry Leibowitz. “The open and close are the exception. It’s hard to make the argument that two auctions is the right answer.” Indeed, Leibowitz says it’s the wrong answer: “Customers can’t be in both, whereas in the market during the day, they can be represented in one spot and know the market can’t trade through them because [the exchanges] are electronically linked.” TD Ameritrade’s Chris Nagy emphasizes a different Reg NMS-related point. He says Reg NMS made the case that competition-rather than where a stock is listed-should dictate how a stock trades. “Previously there was no competition at the opening and now there is,” Nagy says. In his view, Ameritrade’s retail customers now have more opportunities to analyze pricing around the market open and can make better-informed decisions. The regulators are watching what happens. The Securities and Exchange Commission’s Erik Sirri, director of the Division of Trading and Markets (the renamed Division of Market Regulation), sees competition at the open as an opportunity to get names opened earlier, which is good for the market. “Exchanges have an incentive to improve,” he says of both specialist systems and automated auction markets. For the SEC, the key issue is the impact competition at the open may have on market quality. Sirri notes that each exchange could work out “where the price could be” for any given security at the opening. “If, as a result, there’s a problem with the quality of the market,” he says, “we’d have something to sayabout that. If the opening price is consistently biased, we might have a concern.” Sirri adds that brokers, with their duty of best execution, also wouldn’t want to route to a market that provided inefficient prices. UNX’s Michael Rosen adds that two opening prices probably couldn’t be sustained for long if the smaller market built liquidity. “Once that price is published, off goes trading and the market will move to an electronic mode where people can see the top of the book and make their trading decisions,” he says. (c) 2007 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com