Trades done away from the nation’s stock exchanges will almost certainly be subject to new rules, according to a report by Tabb Group. With nearly one-third of all shares now traded inside brokerage houses, the consultancy expects regulators to take a hard look at the impact of off-exchange trading.
Any new rules would follow recent initiatives taken by regulators in Canada, Europe and elsewhere, Tabb reports. “Given current trends, action seems inevitable,” concludes Miranda Mizen, a Tabb analyst and author of the report. “However, the longer the Securities and Exchange Commission waits, the more disruptive will be any adjustment to the market.”
Tabb’s report comes out as the U.S. Senate prepares to undertake a review of off-board trading. Tuesday at 9:30 a.m., the Senate Banking Committee will hold a hearing in the nation’s capital on the controversial issue. Two exchange and two brokerage executives are slated to testify.
Nasdaq OMX Group and NYSE Euronext have complained bitterly in recent years that too much trading was being done inside brokerages while their venues received the leftover “toxic” orders.
For their part, the brokerages that internalize flow in their alternative trading systems, argue they are providing their clients with a much needed service.
Tabb’s report suggests three potential problems with the current arrangement. First, too much off-board trading could discourage traders from posting limit orders on exchanges. Second, off-exchange venues may not be filling orders at appropriate prices or in appropriate quantities. Third, there is a lack of information about the inner workings of the alternative trading systems.
