The Securities Industry and Financial Markets Association is opposing a plan by Nasdaq OMX Group to offer algorithmic trading services to its members.
In a letter to the Securities and Exchange Commission, SIFMA, which represents institutional brokers among others, told the regulator that it is concerned about a national securities exchange offering a service that competes with similar services provided by broker-dealers.
Under its proposal, the Nasdaq Stock Market unit of the exchange operator would offer “benchmark orders” that simulate three common trading strategies. Entering such an order would spawn a series of “child” orders that would achieve a specified benchmark for the user.
The initial benchmarks are designed to match the Volume-Weighted Average Price of a stock, the Time-Weighted Average Price or a defined Percent of Volume of trading in a stock.
Institutional brokerages have been offering such benchmark algorithms for years.
“The Commission should disapprove Nasdaq’s proposal” to offer such benchmark orders, SIFMA associate general counsel Theodore Lazo told the SEC.
SIFMA contends that Nasdaq might get regulatory advantages over brokers that provide the same service. Specifically, the trade organization argued the proposal was flawed on two counts.
First, it objects to Nasdaq characterizing the proposal as part of its regulatory functions and not part of its for-profit commercial operations. Such a characterization would allow Nasdaq to claim immunity from liability should some trade go awry, SIFMA said.
That would give the exchange operator an unfair advantage over broker-dealers that have no such immunity. “It is clear that Nasdaq, in this instance, is acting as a market participant by providing a commercial offering,” Lazo told the SEC.
Second, SIFMA contends that Nasdaq’s offering might not be subject to any risk controls. The group noted that Nasdaq is not subject to the SEC’s relatively new Market Access Rule, which requires brokers to run the orders of any customers they are providing direct electronic access to exchanges through pre-trade risk controls.
That creates a “regulatory disparity” between Nasdaq and institutional brokers, SIFMA contends, which favors Nasdaq over the brokers.
“We believe that it is inappropriate for an exchange to offer the Benchmark Order functionality, or any other type of algorithmic trading offering, when it is not subject to the Market Access Rule,” Lazo said.
Nasdaq filed its algo proposal with the SEC in May. The regulator has some of the same concerns as SIFMA and has twice postponed action.
Nasdaq would not comment for this article. However, Eric Noll, executive vice president for transaction services in the U.S., addressed the issue of exchanges, aka “self-regulatory organizations,” competing with brokerages at a conference last week in New York.
“It’s an interesting debate as to what makes an SRO,” Noll said. “But I do think that one of things we do as an SRO, aside from being a trading venue, is to develop fair and transparent markets, to encourage price discovery, and to enhance the trading experience not only for investors and our member firms but also for our issuing companies.”
