The New York Stock Exchange has moved further away from its origins as a private club. A broker-dealer that’s a member of another exchange but not the Financial Industry Regulatory Authority can now trade directly on the Big Board.
NYSE made this change "to make membership more broadly available to other registered brokers or dealers who are not FINRA members," according to its rule filing with the Securities and Exchange Commission.
This change aligns NYSE’s rules regarding membership organizations with those of BATS Exchange, Nasdaq and others. Those exchanges do not require participants to be FINRA members if they are members of another self-regulatory organization. All broker-dealers in the U.S. are also registered with the SEC.
The NYSE amended its Rule 2, which defines the term "member organization," late last month. The rule became effective with the Commission’s approval of the rule change last week.
For the Big Board, this is a small milestone in its evolution. Through much of the NYSE’s history, member firms were regulated by what is now known as NYSE Regulation. In the last couple of years, all firms also had to be registered with FINRA. Now, they can be non-FINRA-registered members of Nasdaq, for instance, or the tiny Chicago Stock Exchange or the CBSX, the equities market operated by the Chicago Board Options Exchange. The firms must still be approved as NYSE member organizations.
This change comes at a time when high-frequency trading is growing. According to a recent TABB Group study, 73 percent of equities volume comes from these firms, which provide liquidity to the markets. These firms conduct automated market making, statistical arbitrage and various other strategies that depend on low latency. Some of these high-frequency firms are broker-dealers. This enables them to access the markets directly through their own pipes without going through another firm.
Some of these broker-dealers firms are registered with another SRO instead of FINRA. The regulatory responsibilities of brokers, based on the type of business they handle, are equivalent regardless of which SRO is the firm’s designated examining authority.
In its rule filing, the New York said it "believes that this change can be made without any sacrifice of regulatory rigor."
At a Security Traders Association of New York conference last month, David Harris, president of CBSX, the Chicago Board Options Exchange’s equities market, said some high-frequency firms were registering as brokers with the CBOE. One reason, he said, was the CBOE’s relatively quick processing time of several months. Registering at FINRA, which has a longer list of prospective brokers, typically takes about six months.
At the NYSE, all floor brokers and member firms that do business with the public must still be FINRA members. NYSE Amex also made the same rule change that NYSE did to its definition of member organizations. Both NYSE and NYSE Amex are operated by NYSE Euronext.
