By Bradley Hope
After years of fighting for more trading to come back onto stock
exchanges, Nasdaq OMX Group Inc. is considering joining the dark
side.
The exchange operator has approached several of the biggest
banks with a proposal to take over the operation of their "dark
pools," and is planning to ask the Securities and Exchange
Commission for permission to do so, according to Nasdaq Chief
Executive Robert Greifeld.
Dark pools, lightly regulated private trading venues mostly
operated by large banks, have come under scrutiny over the past
year as regulators seek more details about whether they adequately
police trades and disclose enough information to clients.
The company's new business venture would mark a change of tune
of sorts for Nasdaq. Mr. Greifeld--along with the New York Stock
Exchange--traditionally has been a critic of the amount of trading
on dark pools, arguing that such trading hurts the ability of
markets to operate efficiently and facilitate accurate pricing for
stocks.
Mr. Greifeld has repeatedly pushed for the SEC to consider
implementing a so-called trade-at rule, which would force more
trading off of dark pools and onto exchanges. He wrote in an
editorial in The Wall Street Journal in July 2014 that "no one can
argue against the healing power of transparency in the
price-discovery process."
Mr. Greifeld said in an interview that the new initiative was a
response to the needs of the company's customers and not a
strategic change.
Banks' "costs are skyrocketing and our job is figuring out how
we can help them solve that problem," he said.
Nasdaq still would like to see more trading return to exchanges
but meanwhile is trying to position itself as a technology partner
for banks dealing with growing regulatory scrutiny and technology
costs, he said.
Nasdaq's efforts come as its chief rival, New York Stock
Exchange owner Intercontinental Exchange Inc., is trying to force
more trading back onto exchanges through a new proposal circulating
among banks and institutional investors.
Banks are under pressure to rethink how they handle stock trades
in these private trading venues, especially amid probes from
regulators looking for irregularities or preferential treatment of
certain investors.
Also, new regulations approved last year are expected to
increase the cost of running these venues.
"What we've learned in the past two or three years is that any
kind of glitch or error can be the source of a very large
reputational risk," said Sayena Mostowfi, a senior analyst at TABB
Group in New York. "It might be appealing to find an expert to run
those systems."
Nasdaq's pitch is simple: Using its technology, surveillance
software and regulatory expertise, it can manage dark pools on
behalf of banks.
Banks still would be able to trade at lower prices than they do
on exchanges, and bank customers still could trade anonymously.
A final business product hasn't been completed, and plans may
change, the company said.
UBS AG, Credit Suisse Group AG and Deutsche Bank AG operate the
three largest dark pools in the U.S., according to data from the
Financial Industry Regulatory Authority.
Dark pools originally were designed to help investors trade
large blocks of stock while minimizing any impact on the price
caused by those orders and reducing costs by avoiding exchange
fees.
But over time they have grown in size and seen the average size
of trades decline, making them more similar to exchanges but
without the intense regulation exchanges are subjected to by the
SEC and Finra.
The New York attorney general last year accused Barclays PLC of
fraud and misleading customers related to its dark pool, known as
Liquidity Cross. Barclays later denied it misled its clients and
said the New York case was "based on clear and substantial factual
errors."
Other exchanges and nonbank dark-pool operators are expected to
try to get in on the business of operating dark pools for banks,
too, but Nasdaq is among the first to aggressively pitch banks on
the idea, according to people familiar with the presentations.
ICE has privately been trying to persuade banks to agree to a
plan where trading fees are slashed in exchange for a rule that
would require more trading to take place on exchanges.
So far, it has persuaded Credit Suisse to support its plan and
is trying to persuade other banks and investors to sign on to its
proposals.
BATS Global Markets Inc., the third major exchange operator, has
put forward a letter with much more moderate proposals.
Nasdaq has planned a pilot project that would lower the trading
fees on 14 stocks starting in February.
Lowering access fees, which some argue will reduce costs for
brokers and increase trading, is an important part of the ICE
proposal as well.
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