Stock Exchanges Squabble Over End-of-Day Auctions

The New York Stock Exchange and Nasdaq Inc. slammed a plan by rival Bats to shake up the crucial closing auctions that happen daily at 4 p.m. and determine prices for thousands of stocks.

Bats's proposal would "introduce undesirable market fragmentation and volatility," NYSE said in a letter to the Securities and Exchange Commission posted online Thursday. In a similar letter, Nasdaq said the plan was "harmful to investors" and "would establish a dangerous precedent."

The proposal, which awaits SEC approval, would give traders a new way to buy and sell shares of companies listed on NYSE and Nasdaq at the daily closing price without paying fees to NYSE or Nasdaq.

Bats said it would address the criticism in letters to the SEC. "We expected an active comment period and look forward to responding in this healthy debate," a spokeswoman said.

The growing popularity of exchange-traded funds and index-based strategies has increased the importance of the closing auctions in recent years. That is because index-fund managers often seek to buy and sell stocks at prices close to the daily settlement prices, which determine the level of the indexes they are tracking.

For instance, an unusually high 39% of the trading volume in Yahoo Inc. shares on Tuesday took place in its closing auction, according to data from brokerage ITG. The spike came as Verizon Communications Inc. completed its takeover of Yahoo's main businesses, which led benchmark providers FTSE Russell and MSCI to remove it from their indices. That in turn prompted funds tracking those indices to sell Yahoo, traders and analysts said.

On average, 5.9% of the volume in NYSE-listed securities this year has taken place in the closing auction, up from 3.6% in 2012, according to NYSE. For Nasdaq-listed securities, the share of volume at the close rose from 3% to 4.6% over the same period, according to Nasdaq.

Bats's plan threatens to erode NYSE and Nasdaq's bottom lines, said Rich Repetto, an analyst at Sandler O'Neill + Partners. "In the worst-case scenario, they could lose some profitable trading revenue with a knock-on effect on market-data revenue."

NYSE and Nasdaq's control over closing auctions is a vestige of the duopoly they enjoyed until the mid-2000s, when regulations forced greater competition between exchanges.

During the trading day, a stock can be traded on any exchange. But at the close, it reverts to the exchange where it is listed. That means NYSE has an effective monopoly on closing auctions for shares of companies listed on the Big Board, while Nasdaq has a similar grip on closing auctions for Nasdaq-listed stocks.

Increasing fees for trading at the close have led to complaints on Wall Street. "Costs associated with primary markets closing auctions have been steadily increasing in the absence of competitive alternatives," the Securities Industry and Financial Markets Association, a lobby group for financial firms, said in a letter Wednesday to the SEC.

Nasdaq has increased the maximum fee for trading at the close by 60% in the past three years, while NYSE has raised it 16% over the same period, according to SEC filings. The two exchange groups also offer discounted rates for higher-volume traders, and NYSE offers cheaper rates to traders who use floor brokers.

Bats said last month that its plan would create a "competitively priced alternative" to NYSE and Nasdaq's closing auctions.

If approved, the plan would let Bats create a mechanism to replicate market-on-close orders in NYSE and Nasdaq's closing auctions. Such orders allow traders to buy or sell NYSE- or Nasdaq-listed securities at whatever the day's final closing price is.

The plan wouldn't affect limit-on-close orders, in which traders specify the highest price at which they are willing to buy the stock, or the lowest price at which they are willing to sell. By leaving such orders untouched, Bats would avoid "distorting auction price formation," it said last month.

NYSE and Nasdaq disagree, saying it is essential to keep closing-auction trades concentrated in one place. Nasdaq, in its letter to the SEC, also accused Bats of "unabashedly free-riding" on Nasdaq's closing auction.

Bats was acquired this year by Chicago-based CBOE Holdings Inc.

Write to Alexander Osipovich at

(END) Dow Jones Newswires

June 15, 2017 11:52 ET (15:52 GMT)