NEW YORK (Reuters) — Nasdaq OMX Group <NDAQ.O>
is pushing to cut the fees it charges big customers that trade on
several of its exchanges, a move that is arousing the attention of
regulators and triggering accusations from rivals that the company
is seeking to stifle competition.
In late October, Nasdaq told U.S. regulators that it wanted to offer
cheaper trading for customers of one of its options exchanges, if
their total volume of trading with all three of Nasdaq's options
exchanges was substantial.
Regulators balked. The Securities and Exchange Commission put the
proposal on hold in November, and asked rivals and customers for
comment.
If approved, the Nasdaq plan could have far-reaching effects on
competition, pricing and complexity in options and stock markets.
Rivals claim it would end a level playing field by favoring larger
exchange companies that run a number of different marketplaces over
smaller players.
Competition is fierce in the U.S. financial markets, with 12 U.S.
options exchanges and 13 U.S. stock exchanges, as well as dozens of
alternative trading venues.
The latest standoff stems from an obscure feature of U.S. law that
forces each individual exchange to offer the same pricing plans to
all of its customers.
Because of the rule an exchange company cannot on the same market
offer rebates favoring customers who place many orders while also
giving discounts to customers who place a few very large orders, for
example. Instead, the company has to set up different exchanges to
meet the needs of different customers. Each exchange is supposed to
compete with the others, even if they are owned by the same
corporate parent.
Under Nasdaq's proposal, the walls between those units would be
effectively broken down. That's what alarms smaller rivals and
startups, who say that tearing down those barriers will allow Nasdaq
and other established operators to offer cheaper pricing, stifling
competition and entrenching the biggest exchange operators.
Nasdaq said in a lengthy rebuttal made public on Monday that some of
its rivals were just looking to avoid competition. The SEC "should
treat with substantial skepticism any argument by an exchange that a
competitor should not be permitted to reduce its prices," it said in
a letter posted on the SEC's website.
There is no rule explicitly banning the practice of aggregating
volume across exchanges to provide discounts. There are, however,
laws stating that each exchange's fees cannot be unfairly
discriminatory or hinder competition.
Nasdaq declined comment when contacted by Reuters.
"It's a dramatic departure from previous precedent," said Jeromee
Johnson, who runs the BATS Global Markets' options exchange.
Still, the idea is not necessarily bad as investors could ultimately
end up with better prices, Johnson added. BATS runs two separate
U.S. stock exchanges, and is merging with Direct Edge, which also
runs two U.S. stock exchanges.
The proposed pricing plan could be used "benevolently," to lower
prices for some firms, or it could be used "malevolently," allowing
exchanges to use the bundled rebates to gain "mini-monopolies" on
certain segments of the market, said Bill O'Brien, chief executive
at Direct Edge. The proposal needs to be scrutinized, he added.
SEC REVIEW
Nasdaq is looking to lower trading costs for customers of its Nasdaq
OMX Phlx options exchange that also do business on its two other
U.S. options markets, Nasdaq Options Market and Nasdaq OMX BX
Options. To qualify for the rebate, the customer need not do
business with all three exchanges, but its total volume of trading
must meet a certain threshold.
In 2009, Nasdaq tried to lower transaction fees for key customers of
its main U.S. stock exchange that also did a certain amount of
business on Phlx. The SEC repealed that proposal, saying it was not
clear if it met the statutory rules.
In scrutinizing the latest proposal, the regulator will consider
whether it is anticompetitive for individual exchanges to act
together to encourage trading activity, two people familiar with the
SEC's thinking said.
The regulator will also look at the potential impact of Nasdaq's
proposal on the principle of equitable allocation of fees, they
said. That means, for example, if two Phlx members trade the same
amount on the exchange, but one also trades on an affiliate exchange
and therefore qualifies for an extra rebate on Phlx, is it fair to
the Phlx member who did not qualify for the rebate?
Nasdaq said the proposal would lead to lower trading costs, and is
therefore pro-competitive — an argument that one of its biggest
customers, hedge fund and market maker Citadel, supports. Further,
any exchange that felt at a disadvantage by having just one platform
could simply open other exchanges, and operate similar pricing
formats, Nasdaq added.
Deutsche Boerse's <DB1Gn.DE> International Securities Exchange (ISE),
which recently launched its second U.S. options exchange, says it
isn't as easy as that, warning that the process of getting its new
platform off the ground took years and overall costs ran into the
multiple millions of dollars.
"Can exchanges that supposedly compete against each other cooperate
to establish joint fees?" ISE wrote in a letter to the SEC. "We
believe that the answer is a resounding 'No.'"
MIAX Options Exchange, which opened just over a year ago, said it
could not compete against a structure that leverages trading volume
and fees over three competing exchanges.
The proposal "would severely hinder competition amongst options
exchanges and damage the existing market structure that is built on
competition and innovation," MIAX told the SEC.
The SEC has until May 23 to make a decision, although that date
could be extended.
Nasdaq is looking to ensure the SEC hears all of its arguments.
Prominent Washington DC lawyer Eugene Scalia filed a legal motion on
Friday with the SEC on Nasdaq's behalf, asking that parties who
submitted comments on the proposal be required to appear before the
SEC to present oral arguments supporting their positions, according
to a document obtained by Reuters. Scalia, the son of Supreme Court
Justice Antonin Scalia, was not immediately available for comment
Tuesday afternoon.
The exchange operator said in the document that it wants to be sure
it has the chance to rebut any arguments made by other participants.
(Reporting by John McCrank; editing by Paritosh Bansal, Dan Wilchins and Jeremy Laurence)
In late October, Nasdaq told U.S. regulators that it wanted to offer
cheaper trading for customers of one of its options exchanges, if
their total volume of trading with all three of Nasdaq's options
exchanges was substantial.
