Economist, Sep. 2, 2000
EUROPES stockmarkets could not be fighting for their future more publicly. Contrast them with their American cousins, who are slugging it out in private negotiations at the Securities and Exchange Commission (SEC), the main stockmarket regulator. The battleground is an apparently modest proposal by Nasdaq, Americas second-biggest stockmarket, for a new trading system known as Super Montage. Several electronic share-trading firms (known as ECNs), such as Instinet and Bloomberg Tradebook, think this is a disguised attempt to use government regulations to put them out of business. They note that Arthur Levitt, chairman of the SEC, and Frank Zarb, boss of Nasdaq, are old friends who used to work together.
Earlier this month, the SEC came within a whisker of approving Super Montageessentially, a screen displaying the best three bid and offer quotes drawn from every market-maker and ECN for any Nasdaq-listed share. But the commission backed off after a letter from Phil Gramm, the influential chairman of the Senate banking committee, and Tom Bliley, chair of the House commerce committee, asked for an extra 30 days consultation: With changes of this nature, if it is not done right the first time, there may not be a second chance. Consultation was grudgingly extended to mid-September.
According to the Coalition for Fair Competitiona front representing the ECNsSuper Montage is a government-established ECN designed to eliminate all others and then go public with an IPO as a monopoly. Nasdaqs response is characteristically aggressive. It claims that Super Montage will improve the flow of accurate prices to investors, and that the ECNs benefit from a quirk in existing SEC-imposed order-handling rules that allows them, uniquely, to charge both buyers and sellers for trading via their systems, without making this transparent. Al Berkeley, Nasdaqs vice-chairman, says that the ECNs want to delay the introduction of Super Montage as long as possible because every day they have this oligopoly position they benefit financially.
At the SEC, the arguments are more detailedabout how quotes provided by different market-makers and ECNs are integrated into Super Montage. The ECNs object that Nasdaq will add to their quotes an amount reflecting their execution charges, thus ensuring they appear below quotes from market-makers that are not penalised in this way. They argue that their electronic systems have been the main source of improvement in Nasdaqs quotes in recent years, and that this will end with Super Montage. Both sides have a point.
Recent compromises by Nasdaq now seem to have won grudging support from Island, an initially hostile ECN, which accounts for 12% of Nasdaq share-trading volume. Other ECNs suspect that the SEC has bought Island off by promising to approve its application to become a full-blown stock exchange, or has threatened it with a full-scale investigation into trading irregularities by its parent, Datek, a stockbroker.
Benn Steil, an economist at the Council on Foreign Relations, thinks that the likely result of all this politicking will be an SEC-brokered compromise that allows Super Montage to go ahead, but distorts quote integration in ways that ensure the leading ECNs survive, thus preserving merely the appearance of vigorous competition.
What is clear is that Nasdaqs status is ambiguous, as it has become a profit-oriented company while retaining the regulatory privilege that requires ECNs and market-makers to display quotes on its systemand pay it for doing so. It would be better for the SEC to scrap rules forcing different marketplaces to share their quotes, and let traders choose for themselves to direct their business to whichever they think is the most efficient.