June 7, 2018
Dear Mr Fields
Let me start by apologizing for my tardy response, to your request for comments. My dad has routinely tried to impress upon me the need to meet deadlines. In my defence I have been busy with mid term exams, at Aberdeen High, and only became concerned about this debate in recent days.
Our grade 10 economics teacher, Mr Canton, mentioned your proposed pilot some weeks ago, but it was only when my dad showed me a letter the New York Stock Exchange had sent him - as CFO of a NYSE listed issuer - that I became alarmed about the state of this debate. As a shareholder in that company - my dad recently gave me shares for my 16th birthday - I felt I had to respond.
The letter in question, and the BLOG piece it was linked to, contained a number of assertions that the NYSE knows, or ought to have known, were false. While I am a fan or rigorous two sides debate - and hope to join the Aberdeen Debate Society next year - I am not a fan of obfuscation, dishonesty or other logically trickery to win an argument. Debate should be honest, and engage in with an open mind, aimed at finding the greater truth. Instead the NYSE appears to be presenting indefensible numbers in an attempt to fear monger and protect ill gotten gains. Shame on them.
In both the letter and the blog, NYSE confidently states that your pilot will harm investors to the tune of $1 Billion dollars. As a fan of the Austin Powers movies, I found that part awesome. But when I read the underlying analysis I cringed.
NYSE assume that a reduction in average passive rebate, resulting from your pilot, will result in both the bid and offer being backed off, on average, by the exact same amount as the rebate reduction. My understanding of markets suggests this is total nonsense for several reasons:
1) it assumes that only rebate driven liquidity providers set the quote. But in reality the quote is almost always set by natural investors, who have a view of fair price, that is informed by both fundamental and quantitative research as well as the likely impact of their own short term trading intentions. While some HFT are able to consistently gain top of book, they do so by modeling micro term order book dynamics and predicting quote changes. Removing rebates will not disrupt the desire of natural investors to post liquidity and tighten spreads.
2) A massive share of trading in the most liquid names currently occurs on venues - both lit and dark - where passive orders are not paid a rebate. These venues do not have wider spreads, so removing or reducing rebates at classic make / take venues should not result in wider spreads on these names.
That said, let's give the NYSE this point. We will assume spreads magically widen by the rebate reduction, on average. The numbers calculated by NYSE are sill dishonest for the following reasons
1) the NYSE multiplies everything by 2. They suggest spreads will widen by 2 times the rebate reduction, because both sides will back off. So in their calculation they multiple total shares traded times rebate reduction times two. But on any given trade only one side is paying the spread. For example take a stock trading on average at .10 - .11. Assume rebates decline by 10 mills. The new average quote is.099 - .101. If I buy 100 shares, my spread relate costs go up by 10 mills ( .101 vs.10) not 20 mills. Thus the number that NYSE published is overstated by AT Least 100 percent. Are we to believe nobody at the New York Stock Exchange understands such simple math?
2) the calculation uses an ADV of 7.169 Billion shares. That is all trading in tape A, B and C names. Which is to say they include volume that doesn't currently involve a rebate- such as broker crosses, mid point dark, opening and closing auctions. That is flat out dishonest math.
3) they give no allowance for inverted venues. If passive rebate decline will wide quotes, it must be true that passive posting fee declines will tighten spreads.
4) the 7.169 Billion shares includes volume for all stocks, But only 3000 names will be impacted by the pilot. The letter and blog clearly state the pilot may cost investors 1 Billion dollars. But more than 50 percent of names wont be in the pilot. Including their volume is again intellectually dishonest.
As a 10th grader I believe we should base policy on honest data, not fear mongering and spin. I have told my dad he should move his stock to IEX. The NYSE has a mandate to do public good. Their dishinesty belies that mandate. They need to do better.
I wish you good luck with your pilot, and thank you for your efforts. I apologize for any typos, the iPhone X's keyboard is awful.