Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), listens during a meeting of the Financial Stability Board (FSOC) at the US Treasury Department in Washington, DC, USA, on Monday, December 9, 2013.
Andrew Harrer | Bloomberg | Getty Images
On Wednesday, we live live at Piper Sandler’s Global Exchange Conference, which will bring together the heads of major stock exchanges, sales departments, fintech and crypto companies (both physically and remotely).
Speakers include Interactive Brokers CEO Thomas Peterffy, Robinhood CEO Vlad Tenev, Virtu Doug Cifu CEO, Charles Schwab CEO Walt Bettinger, CME Chairman Terry Duffy, Intercontinental Exchange Chairman Jeffrey Sprecher and Nasdaq CEO Adena Friedman.
Cryptocurrency providers such as Galaxy Digital Holdings CEO Michael Novogratz are also speaking and increasingly seeking more influence on the stock exchanges.
Gary Gensler, Chairman of the Securities and Exchange Commission, will give a keynote address and is expected to present new proposals to address order flow payments.
However, there is a bigger problem in the heads of stock exchanges: Do business expect difficult times?
Will titanic trading volumes last?
Stock exchanges are driven by trading volumes and trades have been excellent. Since Covid, daily stock volumes have roughly doubled, from about 7 billion shares a day to about 14 billion shares.
Why? First, $ 0 commissions were a boon to trading. Second, higher volatility usually leads to higher trading volumes, which we witnessed in abundance between 2020 and 2021. Third, much of the increase in trading was initially due to an increase in retail trading activity. This slowed during the market downturn in 2022, but institutional orders filled much of the gap. Stock options and futures trading is also higher.
Will it last? Stock prices on major stock exchanges have fallen this year due to fears that the macro environment will worsen by the end of this year and interest in retail trading will fall even further. The economic slowdown, and the recession in particular, would not be good for trade.
It also doesn’t help that the competition is only intensifying. In 2020, two new exchanges were launched, the Members Exchange and the MIAX Pearl Equities Exchange.
This has led to intense price competition. In response, exchanges are turning to other sources of revenue, such as data billing, which is now a significant part of the revenue stream for both ICE (NYSE) and Nasdaq.
Gensler wants change
Gensler will deliver the keynote address on the first day and take the opportunity to propose changes to the current order flow payment system, in which brokers send their orders to market makers in exchange for payments. This allows some brokers to charge zero commissions. Gensler said there could be a conflict of interest for brokers and that too much power is concentrated in a handful of market makers. Gensler is likely to come forward with proposals that would reduce the influence of wholesale market makers such as Virtu and Citadel Securities.
However, the industry is likely to push back against big changes. They will ask Gensler for data indicating that the current system is not working and that retailers are actually at a disadvantage.
“The same wholesalers have a very good argument that paying the order flow has reduced commissions to zero,” said CNBC’s Amy Lynch, president of FrontLine Compliance and a former SEC compliance officer.
“The SEC may succeed in restructuring how order flow payments work and how they are disclosed, but it will not eliminate it completely because it is too entrenched as a source of revenue for brokers,” she said.
High volatility breeds more e-commerce
The liquidity of the bond market is likely to be much discussed.
High volatility is beneficial for electronic platforms such as MarketAxess and Tradeweb, which have seen an increase in the share of bond trading in recent years. However, spreads have widened in corporate bonds and corporate America is paying more for borrowing money. New issues are lower and prices are under pressure.
Solving the issue of cryptocurrency regulation
Cryptocurrency providers have been speaking at the conference for several years, but stock exchanges have been reluctant to plunge into cryptocurrencies on a large scale due to regulatory uncertainty and turf wars between the Commodity Futures Trading Commission and the Securities & Exchange Commission.
However, the bill, introduced by Senators Kirsten Gillibrand and Cynthia Lummis on Tuesday, is a step towards resolving the uncertainty. It would classify digital assets as commodities and provide primary regulatory control to the CFTC, a move likely to be welcomed by cryptocurrency speakers at the conference.
Many people in the crypto-community have resented Gensler, who refused to approve pure bitcoin ETFs. They believed that regulation within the CFTC would be much less difficult than under the SEC.
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