July 10, 2018
Dear Mr Fields
I have continued to watch your comment process, with great interest, during my summer break. After my first comment letter, Ms. Elizabeth King, from NYSE, kindly invited my economics class to visit the New York Stock Exchange. After reading her latest comment letter, I can't help but think she should have invited my creative writing class instead. Mrs Cifu, our creative writing teacher, loves New York, and great fiction. Ms. King is one of America's great fiction writers.
As all the cool kids are now sending in follow up letters, in reaction to others' submissions, I have decided to correct some of the flaws from Ms. King's latest effort.
1: IEX deliberately misrepresents NYSE's position on rebates
Ms King suggests that IEX quoted Jeffrey Sprecher, out of context. She maintains that NYSE have always been in favor of fee caps, but only in concert with other changes that would promote greater liquidity in the lit markets. While NYSE have promoted such a position during the last few years, and objective reading of Mr Sprecher's comments in January 2014 will conclude that no such grand bargain was yet on offer. Instead Mr Sprecher noted that maker taker "hurts everybody in the industry" and "creates false liquidity by attracting people who are there solely to try and make rebates and not actually trade and hold risk". Clealy the comments made by IEX, in their first comment letter, are fair and accurate.
2: The transaction fee pilot is NOT about Market Data
Ms King goes on to chastise IEX for linking the study to NYSE conflicts around specialized market data and collocation offerings. However, while Mr Sprecher did not suggest that capping fees could be coupled with trade at and lower data fees, several NYSE executives are on record making such suggestions, including both the current and past presidents of the NYSE. Thus IEX has not manufactured such a relationship.
3: Positive comment letters do not mean the proposal is appropriate for investors
The underlying narrative of the King letter is that IEX has unfairly slandered NYSE, and sullied their reputation. I find it disturbing to see such a letter contain remarks that can only be viewed as slandering the buy side en masse. Ms King flat out suggests that buy side support of the pilot may be driven by a belief the "darkening of public markets" will create "a competitive advantage should they excel at sourcing liquidity privately". This statement is incredibly telling. The New York Stock Exchange has publically suggested that a large swath of institutional investment firms are pushing for a pilot despite knowing it will harm public markets. How dare she. I suggest that the NYSE would not have made such allegations in the good old days, when they cared about institutional investors. But since the advent on Maker taker, and the ability to cater to marginal proprietary flow, the NYSE has lost interest in the well being of institutional investors and their chosen agents.
4 NYSE's cost study is based on straight forward logic.
I walked through the challenges with the study in my previous letter. The NYSE responded by ignoring my math and slandering dark pools. My math stands. Any study that includes brokers crosses, opening and closing auction and swap volumes is flawed.
Ms King suggests that institutional investors don't like to set new prices. That is pure nonsense. As explained in my last letter, natural buyers and sellers set price. Prop players, driven by rebate harvesting, predict quote changes to gain top of book. The study suggests that prop players will offer less liquidity, thus spreads will widen. Just like they widened in the UK when the LSE dropped maker taker. Except that spreads didn't widen in the UK. Hmmmm.
Ms King also uses a tortured analysis of spreads on EDGX and EDGA to make the 1 Billion dollar number seem conservative. EDGA only traffics in the most liquid names, as is common for take make and take take venues globally. As such, including spreads on Russell 2000 names is intellectually dishonest and distorts the real likely impact of the pilot. It is these distortion that have swayed issuers to push back on the study.
In conclusion, the NYSE has offered up a whiny comment letter claiming IEX have been dishonest and slanderous. Yet an objective observation of fact and history shows that it is NYSE that has slandered and misinformed. They are clearly trying to protect the interets of their own shareholders, and favored HFT clients, with zero regard for institutional investors or corporate issuers.
The NYSE has an obligation to public good. I can't fathom how baseless slander, obfuscation and lies contribute to this good. The largest, smartest investors on the planet have clearly stated the pilot will improve markets. Sadly, better markets are not of great concern to the NYSE. This is why the SEC is such an important body.
I wish you well with the pilot, and thank you for providing so much enjoyable summer reading. I look forward to your data fee proposals.
I still use the Apple X, and apologize for any typos.
Stay woke
Danny
On Jun 7, 2018 11:01 AM, "Danny Mulson" <dgcmulson@gmail.com> wrote:
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.
Sincerely
Danny Mulson
10th Grader
Aberdeen High
Wetlawn, Oregon