Published April 17, 2012
Once bitter rivals, Big Board chief Duncan Niederauer and Nasdaq chief Bob Greifeld are now teaming up to address a problem that is plaguing both exchanges: The movement of massive amount of stock orders to off-exchange trading locations, known on Wall Street as "dark pools."
People with direct knowledge of the matter tell the FOX Business Network that both exchange CEOs have recently met to discuss a joint lobbying effort to combat the increasing use of so-called dark pools by institutional investors to buy and sell stock.
Niederauer and Greifeld also met with officials at the Securities and Exchange Commission last week to make their case on the problems with large amounts of trading occurring on dark pools.
Their beef with the off-exchange trading spots is pretty simple: Dark pools are costing both exchanges money as stock trading volume flows to these private venues. Such trading also makes it difficult for stock prices to reflect market forces since price discovery occurs in secret without being posted on either exchange.
It's unclear exactly what Niederauer and Greifeld discussed at their own meeting or with market structure officials at the SEC last week other than how the increased use of dark pools is hurting price discovery and ultimately harming small investors.
Trading in dark pools has risen dramatically in recent years in large part due to regulatory pressure to create competition among various exchanges. Sandler O'Neill analyst Rich Repetto says as much as 40% of all trading now occurs off the exchanges, a sharp rise from just a few years ago.
But there is a drawback to such trading: Large institutional investors can gain a price advantage over small investors by trading stocks in what is essentially a private market for the shares of public companies. The exchanges are already being squeezed financially by overall lower trading volume amid redemptions from mutual funds as small investors flee the markets. Thus the loss of institutional trading presents yet another financial blow to the exchanges, which earn fees based on the volume of stock traded.
The joint effort is unusual because Niederauer and Greifeld have been until recently bitter rivals -- some would say enemies. The NYSE and the Nasdaq are the world's two largest exchanges specializing in matching customer orders for stocks, and last year, when Niederauer announced his intention to merge the NYSE with the Deutsche Boerse, Greifeld launched a hostile takeover of the NYSE.
Greifeld's bid to take over the Big Board failed amid an intense lobbying effort by the NYSE that ultimately convinced U.S. regulators the combination of the NYSE and Nasdaq stock listing business would violate U.S. antitrust laws. Likewise, the NYSE's proposed mega-deal with the Deutsche Boerse failed as Nasdaq lobbied European regulators that the combination would violate European regulations.
More recently, both exchanges fought hard to win the high-profile Facebook IPO listing, which much to the dismay of Niederauer went to Greifeld and the Nasdaq.
Spokesmen for the NYSE and Nasdaq declined to comment but would not deny the two CEOs have recently met to plan a joint lobbying effort on the issue.
But in an exclusive interview Monday with the FOX Business Network, Niederauer tipped his hand that the two exchanges may be addressing the dark-pool issue as one voice. Niederauer first denied that he has personal animus toward Greifeld, comparing their rivalry to basketball coaches Rick Pitino of Louisville and Kentucky coach John Calipari, in which "we're going to fight really hard on the field but at the same time, we've got some common interests."
In the interview, he added: "We have an opacity problem in the markets. Forget the fragmentation. I think the bigger issue that we're only starting to talk more about is almost 40% of the market isn't getting to his exchange or mine. So, I think the two of us have a lot more in common we should be working on."