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Will NYSE Become More Transparent Like ICE?

ICE's Thomas Farley said some eye-opening things about the future of the U.S. equities markets.

I recently attended the annual Zicklin-Capco Conference in Finance at the Zicklin School of Business of Baruch College in New York. It was great to see Capco sponsoring this industry conference and to meet the diverse Baruch students who are eager to join financial services -- a refreshing reminder that financial services is still an engine of opportunity for many.

Tom Farley, SVP of Financial Markets,  IntercontinentalExchange
Tom Farley, SVP Financial Markets, Intercontinental Exchange

The keynote speaker for the conference was Thomas W. Farley, SVP, Financial Markets, IntercontinentalExchange (ICE). Farley provided a good overview of the current state of the futures and swaps market, which he described (among other things) as one where prices are respected, where all customers are treated the same and where there is significant competition. In full disclosure, I don't know much about the market, but it certainly sounded like a capitalist's version of Eden. I'd be curious if others share his view.

In contrast, although the equities markets have similar customer types and goals, according to Farley the equities markets are "not exclusively lit" with dark pools and internalization of retail orders limiting transparency. He also cited mandatory interconnectedness, differential treatment of stakeholders and market fragmentation as factors that have led to "widespread customer dissatisfaction with the status quo."

[For more info on what may become of NYSE Technologies, read: Uncertain Future For NYSE Technologies.]

Most telling were Farley's revelations about what ICE is likely, post-acquisition, to do about it. While noting that he was limited in what he could say pre-merger, he said that improvements were clearly needed. Change is coming at a time where all of the players are equally unhappy. He noted that either regulators or market practitioners could be the catalyst.

In his view, the regulatory priorities are encouraging but regulator's actions can't be predicted. Hence, he expects the newly merged ICE/NYSE to act and provided six potential areas of focus post-closing:

  • Increase respect for displayed prices and price discovery throughout the industry
  • Reduce complexity of the cash equities markets
  • Identify the root of fragmentation and re-aggregate liquidity
  • Increase transparency and fairness of practices among exchanges, ATS/ECNs and broker-dealers
  • Improve operational and risk controls at each venue and market-wide
  • Evolve toward fairer and simpler pricing models throughout the industry

He also had positive views on the NYSE trading floor and, although he acknowledged he needed to learn more about it, said his instinct would be to "celebrate it and cement it into the structure." Finally, he said that an attitude of enforcement and compliance would prevail, where bad behavior would be acted on and punishment would be visible.

As a financial services industry professional and occasional stock purchaser, I found Farley's views to be encouraging (although there seemed to be some skeptics, particularly among the academics in the audience). In combination with the recent moves to re-focus the NYSE on its core mission, we will certainly see some significant changes to NYSE in the near future. Jennifer L. Costley, Ph.D. is a scientifically-trained technologist with broad multidisciplinary experience in enterprise architecture, software development, line management and infrastructure operations, primarily (although not exclusively) in capital markets. She is also a ... View Full Bio

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IvySchmerken
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IvySchmerken,
User Rank: Editor at Large
11/6/2013 | 5:31:21 PM
re: Will NYSE Become More Transparent Like ICE?
ICE's list of market structure goals to simplify equity markets is admirable but is going to take a long tine because the SEC wants evidenced-based data. As a first step the SEC is using its Market Information Data Analytics (MIDAS) system to study the bids and offers on each stock on each exchange. http://www.sec.gov/marketstruc...
IvySchmerken
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IvySchmerken,
User Rank: Editor at Large
11/1/2013 | 1:22:21 PM
re: Will NYSE Become More Transparent Like ICE?
To re-aggregate liquidity back to exchanges would require reversing the flows going to internationalization and dark pools. If the SEC reviews market structure and implements a "Trade-At"Rule, this would require a dark pool or sell-side internalizer to offer a better price than the lit market's bid-offer before it could receive the order. As far as the interconnectness and fragmentation of equities markets, some would argue there is more competition in equities and that futures exchanges are monopolistic since you can only trade a listed-future on one exchange and the same exchange owns its clearing firm.
gogreen-traders
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gogreen-traders,
User Rank: Apprentice
11/1/2013 | 11:58:06 AM
re: Will NYSE Become More Transparent Like ICE?
It's easy to say these things, but it is much harder to actually "do" anything about them. Some of the things that Farley mentions directly benefit NYSE. To change them, or remove them, would hurt revenue. Plus, many other market participants will oppose these ideas, since they would hurt their models as well.
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