- Bats, the stock exchange recently acquired by the Chicago Board Options Exchange, is proposing a new model for trading at the end of the day.
- The model represents a direct challenge to the New York Stock Exchange and Nasdaq.
- Some of the largest companies in the US have voiced their opposition to the proposed Bats Market Close, which they say would harm the markets.
Some of the largest companies in the US are speaking out against a proposal by Bats, the stock exchange recently acquired by the Chicago Board Options Exchange, to shake up end-of-day trading.
FedEx, P&G, and Cardinal Health are among the firms listed on the New York Stock Exchange that have sent letters to the Securities and Exchange Commission opposing Bats Market Close. The new offering would allow NYSE- and Nasdaq-listed securities to be matched on Bats at the end of the trading day.
The proposal is a direct attack on the NYSE and Nasdaq model, and it comes at a time when more and more trading is conducted at the end of the day.
According to Bats, closing auction fees have increased by 16% to 60% at the NYSE and Nasdaq. The exchange operator hopes that Bats Market Close would increase competition.
However, several firms listed on the NYSE said in letters to the SEC that Bats' model would take power away from their designated market makers. Such firms are tasked with matching trades for their assigned companies and dampening volatility in the stocks. The NYSE pitches the benefit of these DMMs when trying to win initial public offerings.
"We have confidence in the ability of our designated market maker to properly assess supply and demand and ensure a fair, transparent, and stable price discovery process," Mickey Foster, the VP of investor relations at FedEx, said in a letter. "The Bats proposal would impair this valuable system by diverting flow away from the central auction and adding another challenge to investors seeking liquidity."
Cardinal Health also highlighted the benefit of DMMs in a letter to the SEC. Here's the firm's SVP of investor relations, Sally Curley (emphasis added):
"Fragmenting liquidity in the closing auction would impact the DMM's ability to provide this service and could lead to increased volatility for our investors. This is particularly worrisome during a period when passive investing is on the rise, and public companies are increasingly at a disadvantage in identifying their shareholder base."
In some cases, portions of the responses are nearly identical. For example, letters from P&G, Encana Corporation, CACI International, and Turning Point Brands all included a variation on this sentence from Cardinal Health's letter: "Our expectation is that the DMM will facilitate fair and orderly trading and will commit sufficient capital to help dampen volatility."
Financial-market participants have also weighed in. GTS and IMC, both designated market makers, said the Bats proposals would hurt public companies. And in a joint letter to the SEC, three executives at T. Rowe Price, which is listed on Nasdaq and manages $860 billion in assets, said an increase in competition at the end of the trading day would come at a great cost.
"It would certainly create a fee competitive alternative to the primary listing markets' closing auction, but we do not see this improving the process, price discovery, or liquidity at the closing auction," the trio wrote. "We anticipate that other exchanges would seek to offer similar order types to BMC and this would increase fragmentation."
More fragmentation, they say, would make the markets less liquid because it would be more difficult for the buy side and sell side to come together to make a trade.
Bats has its supporters, too. The US equity trading platform PDQ Enterprises, the agency broker Clearpool, and the high-speed trading firm Virtu Financial all favor the proposal. IEX, America's newest stock exchange, is also in favor, even though the exchange's CEO, Brad Katsuyama, has clashed with Bats executives in the past.
"IEX is considering filing a similar proposal in the near future and believes that such alternatives will promote competition and provide an alternative for investors and other participants who want to receive an execution at the closing price," it said in a letter.
