Can Credit Suisse Own an Exchange? Maybe Not

Credit Suisse is not likely to be able to register its Light Pool trading system as a national exchange and retain sole or even majority ownership in it.

Larry Tabb, namesake founder of the Tabb Group consultancy, said Friday he is “not sure you can do that from a regulatory perspective as a single entity. They may have to sell it off, spin it out.’’

The Wall Street Journal Thursday evening reported that the Credit Suisse Group “is quietly pushing to turn one of its trading venues into an exchange, an unusual bid that, if successful, would create the only U.S. stock exchange owned outright by a Wall Street bank.’’

The financial news organization said Daniel Mathisson, Credit Suisse’s U.S. stock-trading chief, confirmed that “preliminary talks” had been held with federal securities regulators about the idea. Mathisson, who is traveling, could not be reached for comment Friday.

The Securities and Exchange Commission in the past decade has at least twice indicated that it would not approve the registration of a national exchange in which a single broker such as Credit Suisse owned more than 20 percent.

When national exchanges such as the New York Stock Exchange and the Nasdaq Stock Market started to convert themselves to for-profit entities, the SEC in a policy statement on “self-regulatory organizations” (another name for national stock exchanges, reflecting their responsibilities to surveil the trading conducted on their markets):

“The Commission preliminarily believes that a member ownership and voting limit of 20% is an appropriate threshold because it precludes situations where a member would have a realistic probability of being able to exert undue influence over its SRO, yet refrains from interfering in an SRO’s organizational processes or the desire by members to acquire equity interests in their markets. In some Commission rules, a 10% ownership threshold is used to determine “control.”

And, in 2006, when it approved the registration of the Nasdaq Stock Market, in its for-profit form, the SEC said:

“The Nasdaq Exchange’s proposed rules also prohibit Exchange members and persons associated with Exchange members from beneficially owning more than 20 percent of the then-outstanding voting securities of the Nasdaq Holding Company. Members that trade on an exchange traditionally have ownership interests in such exchange.”

The point: That a broker or any other member would have an inherent conflict if it owned a sizable piece of an exchange. The broker, according to one regulatory official familiar with the law, would have an inherent conflict. The broker would be incented to favor orders that generated fees for itself or a related part of its organization, over orders that generated fees for other parties.

The SEC Friday was not dismissing the prospect of a broker-owned exchange.

“If we were to receive such a proposal, we would weigh the potential impact on investors and markets just as we do with any other proposal,” said spokesman John Nester.

Light Pool was started up last year, the first new electronic communications network in five years. The trading system was designed to give long-term, institutional investors such as mutual funds, hedge funds, pensions and endowments the means to trade openly in U.S.-listed stocks, but escape the clutches of high-frequency traders, with their extremely short-term buy-and-sell horizons.

Credit Suisse also operates one of the world’s largest dark pools for anonymous trading in stocks, Crossfinder.

If Credit Suisse somehow were able to gain approval for Light Pool to become a national exchange, the financial services firm based in Switzerland would still not have clear sailing.

Other brokers serving institutional investors such as Goldman Sachs or Morgan Stanley would not be likely to “trade on a platform that was owned by a single broker” such as Credit Suisse, Tabb said.

And, if Credit Suisse got approval to turn its alternate trading system into a registered stock exchange, other brokers running similar systems would want the same status, he said.

“I think you would see a whole rush for the brokers to turn their (alternative trading systems) into exchanges, and fight for the market data rebates,’’ he told Traders Magazine.