(Wikimedia)
There's a new front in the brutal battle among America's stock exchanges.
Bats, which is America's second-largest stock market and is now a part of Chicago Board Options Exchange, is proposing an alternative to the closing auction at the end of the trading day. The proposal is a direct attack against the New York Stock Exchange and Nasdaq model, and it comes at a time when more and more trading is conducted at the end of the day.
"The last years have seen primary market auction operators steadily increase fees while, conversely, intraday trading fees have steadily dropped," Bryan Harkins, the head of US equities and global foreign exchange at Bats, said. "This has made a critical portion of trading markedly more expensive."
Last year, Credit Suisse took a look at the percentage of the day's US stock-trading volume that is in the "market on close," or MOC, print. This is a kind of order that is executed as close to the end of the market day as possible. The average volume has increased to 9.8% from 8.4% in the past two years, according to the Swiss bank. According to Bats, closing auction fees have increased by 16% to 60% at the NYSE and Nasdaq.
"When you're running an exchange, it's very hard to make all of your market participants happy," Harkins said. "There are very few things we've worked on where there has been so much overwhelming support."
Bats plans to launch Bats Market Close, an end-of-day match process for securities that aren't listed on Bats. Under the model Bats is proposing, participants route MOC orders to BMC, where they are matched with other MOC orders at 3:35 p.m. ET. The trades are then executed when the primary exchange closing price is published. Because of the early 3:35 p.m. ET match process, any unmatched MOC orders can be added to the primary exchange closing auction.
"It provides an alternative in such a way that it reduces costs for market orders but preserves a single, consolidated closing price, all through an exchange platform," Harkins said.
To recap, it's supposed to look a little like this:
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Stock A is listed on NYSE/Nasdaq, and Investor 1 wants to sell at the closing price but doesn't want to participate in the NYSE/Nasdaq closing auction.
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Investor 1 places a sell order for Stock A at BMC, where it is matched at 3:35 p.m. with an order on the other side.
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The trade executes at the closing price published by NYSE/Nasdaq.
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If there isn't a match for Investor 1's sell order, the investor has the choice of putting the order into the NYSE/Nasdaq closing auction.
The BMC process is pending approval by the US Securities and Exchange Commission, and as is customary, rivals will have the opportunity to comment on the plans. Harkins said he expected there to be a response.