A couple of articles of interest came out this afternoon about our objections to practices that Larry Leibowitz mentioned in a speech last week, which I posted earlier today.

One article, from Bloomberg: “NYSE Asks SEC to Strike Down Nasdaq, Bats Plan to Hold Orders” Sorry, no link available. Excerpt:

NYSE Euronext, the world’s largest stock exchange, asked U.S. regulators to stop rivals Nasdaq OMX Group Inc. and Bats Exchange Inc. from introducing a feature to hold orders for a fraction of a second, claiming it will lead to investors getting worse prices for stocks.
The Securities and Exchange Commission should strike down Nasdaq’s May 6 plan to hold orders and prevent Bats from adopting a similar feature, NYSE Euronext said in a letter posted today on the agency’s Web site. Nasdaq and Bats want to give customers an additional opportunity to fill an order before the market ships the trade to other exchanges with the best price.
… In 2005, the SEC imposed rules that require exchanges to route orders to the market that has the best price. The agency should review whether the introduction of mechanisms that delay the routing will hurt investors, NYSE Euronext said in the letter.
“The potential widespread use of holding orders by multiple market centers would impede the free and open market system” contemplated by the 2005 rules, the NYSE said. …

The other article: “NYSE Euronext Takes ‘Dark Pool’ Complaints to SEC,” from Dow Jones Newswires, via WSJ.com. Excerpt:

… In a letter to SEC Secretary Elizabeth Murphy, the operator of the New York Stock Exchange alleged that new order types developed by Nasdaq OMX Group (NDAQ) and BATS Exchange could hurt the investing public, and urged tougher oversight for private pools of liquidity.
… Critics argue that, as a greater amount of stock trades are executed away from public markets, exchange-listed stock prices become a less accurate gauge of market sentiment.
In its letter, NYSE Euronext said that routing stock orders through dark pools also delays execution and makes it harder for authorities to track market activity. …

For more perspective, I urge you to read our letter, which I think makes clear that we’re not criticizing dark pools — we own dark pools ourselves, as the latter article point out — rather, we’re criticizing certain, specific practices proposed by NASDAQ and BATS. As the letter says, they’re seeking “to:modify their respective routing strategies to provide preferential treatment for their own market participants before routing orders to away markets.

“As described more fully below, NYSE Euronext believes that the time is ripe for the Securities and Exchange Commission (“Commission”) to review not just the proposed Nasdaq and BATS functionality, but similar trading functionality used by registered alternative trading systems (“ATS”) that provide non-public order information to a select class of market participants at the expense of a free and open market system. Pending such market-wide review, NYSE Euronext respectfully urges the Commission to abrogate the above-referenced Nasdaq filing and reject the BATS filings as not non-controversial.”

Your comments are welcome below. And yes, I’ll bother you no more today.

A couple of articles of interest came out this afternoon about our objections to practices that Larry Leibowitz mentioned in a speech last week, which I posted earlier today.

One article, from Bloomberg: “NYSE Asks SEC to Strike Down Nasdaq, Bats Plan to Hold Orders” Sorry, no link available. Excerpt:

NYSE Euronext, the world’s largest stock exchange, asked U.S. regulators to stop rivals Nasdaq OMX Group Inc. and Bats Exchange Inc. from introducing a feature to hold orders for a fraction of a second, claiming it will lead to investors getting worse prices for stocks.
The Securities and Exchange Commission should strike down Nasdaq’s May 6 plan to hold orders and prevent Bats from adopting a similar feature, NYSE Euronext said in a letter posted today on the agency’s Web site. Nasdaq and Bats want to give customers an additional opportunity to fill an order before the market ships the trade to other exchanges with the best price.
… In 2005, the SEC imposed rules that require exchanges to route orders to the market that has the best price. The agency should review whether the introduction of mechanisms that delay the routing will hurt investors, NYSE Euronext said in the letter.
“The potential widespread use of holding orders by multiple market centers would impede the free and open market system” contemplated by the 2005 rules, the NYSE said. …

The other article: “NYSE Euronext Takes ‘Dark Pool’ Complaints to SEC,” from Dow Jones Newswires, via WSJ.com. Excerpt:

… In a letter to SEC Secretary Elizabeth Murphy, the operator of the New York Stock Exchange alleged that new order types developed by Nasdaq OMX Group (NDAQ) and BATS Exchange could hurt the investing public, and urged tougher oversight for private pools of liquidity.
… Critics argue that, as a greater amount of stock trades are executed away from public markets, exchange-listed stock prices become a less accurate gauge of market sentiment.
In its letter, NYSE Euronext said that routing stock orders through dark pools also delays execution and makes it harder for authorities to track market activity. …

For more perspective, I urge you to read our letter, which I think makes clear that we’re not criticizing dark pools — we own dark pools ourselves, as the latter article point out — rather, we’re criticizing certain, specific practices proposed by NASDAQ and BATS. As the letter says, they’re seeking “to:modify their respective routing strategies to provide preferential treatment for their own market participants before routing orders to away markets.

“As described more fully below, NYSE Euronext believes that the time is ripe for the Securities and Exchange Commission (“Commission”) to review not just the proposed Nasdaq and BATS functionality, but similar trading functionality used by registered alternative trading systems (“ATS”) that provide non-public order information to a select class of market participants at the expense of a free and open market system. Pending such market-wide review, NYSE Euronext respectfully urges the Commission to abrogate the above-referenced Nasdaq filing and reject the BATS filings as not non-controversial.”

Your comments are welcome below. And yes, I’ll bother you no more today.

Excerpt from an interview in the new BusinessWeek:

MARIA BARTIROMO: The proposals coming out of the Obama Administration are the talk of the business world, particularly the tax on international profits. What are you hearing about this new proposal to tax profits differently?

DUNCAN L. NIEDERAUER: I was in Texas and California in recent weeks and probably met with 100 company executives. The reactions among many could be summarized in the following two observations. No. 1: Doesn’t the Obama Administration recognize that most [big] U.S. companies are multinationals that happen to be headquartered in the U.S.? No. 2: Doesn’t the Obama Administration appreciate that a multinational headquartered in the U.S. doing business overseas does not mean the company is evading taxes? If somebody who’s operating in the U.S. has an overseas business with a mailbox in a tax haven then obviously that is bad behavior and should be dealt with. Companies that have overseas businesses in legitimate tax jurisdictions, who pay taxes in those jurisdictions on the business they do there, that is not in the same category. And what I’m hearing from executives is that this proposal suggests we’re all behaving badly, when, in fact, I would imagine very few of us are.

What’s the reaction going to be?
The initial sense we’re getting—and we plan to survey our listed companies in the coming days to get a more accurate read—is that these companies will find ways to cut expenses to compensate for this increase in taxation, and that will probably be largely in the form of jobs. And companies might continue to be headquartered in the U.S. but would perhaps incorporate in another G-20 jurisdiction.

Besides job cuts, are there other implications?
As a student of the market, you’ll appreciate this. If $210 billion is coming out of everybody’s aftertax net incomes over the next decade, put whatever multiple you want on that, and that would tell you trillions of dollars should rationally come out of equity market capitalization were this to go forward. The other implication is probably it’s got to have a negative impact on our ability to compete because it almost encourages you to be a localized company, not a multinational.

Read more here. And please let us know what you think, in the comment box below.

“[O]ur market structure has gone astray,” Larry Leibowitz last week told the Securities Industry and Financial Markets Association’s annual market structure conference. “Over the past 15 years the order-handing rules, decimalization, Reg. NMS were all designed to increase transparency, level the playing field and encourage limit-order display. We now live in a completely fragmented market, with 50 or so dark pools, 10 or so exchanges, and liquidity displayed to privileged participants. Liquidity has been driven underground and there is a privileged club of people who get to see orders before the marketplace as a whole. We welcome the SEC’s comments toward looking at order-handling practices, looking at ATS practices, looking at surveillance, because the truth is, we need disclosure. We need good surveillance because when information is leaked out of the marketplace in a non-level playing field way, we need to be really careful about that.”

Other points from Larry, who is NYSE Euronext’s head of U.S. Markets and Global Technology:

• Moves to stabilize the economy can be nit-picked but have been “directionally right;”
• Latest initiatives from NYSE Euronext, including enhanced trading capabilities, faster platforms and new markets;
• The need for regulatory clarity, and to re-regulate in a way that is global in perspective, and not overly burdensome, punitive and ultimately self-defeating;
• Reinvention on the NYSE Trading Floor;
• Treasury’s plan for greater transparency in over-the-counter derivatives is welcome; we need solutions that work for the industry as well as for the greater good;
• The new listing market of choice for tech companies;
• How the necessity of restoring confidence in the integrity and fairness of the markets sometimes means “taking medicine that we don’t like, such as the short-sale restriction;”
• The need for all market participants to step up and engage in the dialogue about structure and regulation right now, before the opportunity passes.

And more, and he presented all this in a very candid, conversational and accessible way, and took questions. (I know, I was there!) The full transcript is here. As always your comments are welcome in the box below. Have a great weekend, folks.

Excerpt from an interview in the new BusinessWeek:

MARIA BARTIROMO: The proposals coming out of the Obama Administration are the talk of the business world, particularly the tax on international profits. What are you hearing about this new proposal to tax profits differently?

DUNCAN L. NIEDERAUER: I was in Texas and California in recent weeks and probably met with 100 company executives. The reactions among many could be summarized in the following two observations. No. 1: Doesn’t the Obama Administration recognize that most [big] U.S. companies are multinationals that happen to be headquartered in the U.S.? No. 2: Doesn’t the Obama Administration appreciate that a multinational headquartered in the U.S. doing business overseas does not mean the company is evading taxes? If somebody who’s operating in the U.S. has an overseas business with a mailbox in a tax haven then obviously that is bad behavior and should be dealt with. Companies that have overseas businesses in legitimate tax jurisdictions, who pay taxes in those jurisdictions on the business they do there, that is not in the same category. And what I’m hearing from executives is that this proposal suggests we’re all behaving badly, when, in fact, I would imagine very few of us are.

What’s the reaction going to be?
The initial sense we’re getting—and we plan to survey our listed companies in the coming days to get a more accurate read—is that these companies will find ways to cut expenses to compensate for this increase in taxation, and that will probably be largely in the form of jobs. And companies might continue to be headquartered in the U.S. but would perhaps incorporate in another G-20 jurisdiction.

Besides job cuts, are there other implications?
As a student of the market, you’ll appreciate this. If $210 billion is coming out of everybody’s aftertax net incomes over the next decade, put whatever multiple you want on that, and that would tell you trillions of dollars should rationally come out of equity market capitalization were this to go forward. The other implication is probably it’s got to have a negative impact on our ability to compete because it almost encourages you to be a localized company, not a multinational.

Read more here. And please let us know what you think, in the comment box below.

From the Red Hat press release:

NYSE Euronext Co-CIO to Deliver Keynote at 2009 Red Hat Summit

Steve Rubinow to share strategy of building one of the world’s most mission critical IT environments with open source

RALEIGH, NC - May 27, 2009 - Red Hat, Inc. (NYSE: RHT), the world’s leading provider of open source solutions, today announced that Steve Rubinow, co-global chief information officer at NYSE Euronext, will keynote at the 2009 Red Hat Summit.

NYSE Euronext (NYX) operates the world’s largest and most liquid exchange group. With over 8,000 listed issues globally, NYSE Euronext’s equities markets represent nearly 40 percent of the world’s cash equities trading volume, the most liquidity of any global exchange group. NYSE Euronext unifies six cash equities exchanges in five countries and six derivatives exchanges. It strives to provide the highest possible market quality, innovation and customer choice.

NYSE Euronext must meet and exceed daily IT demands to handle heavy workloads while producing fast-paced performance results across its global systems. With its cutting-edge IT strategy, led by Rubinow, it has brought the exchange group to the forefront of elite IT innovation with systems that push the highest speed, scalability and performance expectations.

“Due to the mission-critical nature of our infrastructure to our business and that of our customers, NYSE Euronext seeks to deliver optimal uptime and system performance,” said Rubinow. “I’m looking forward to sharing our open source strategy with people at the Red Hat Summit and discussing our approach to innovation in a high pressure environment.”

Rubinow has decades of experience in the information technology industry, leading technology innovation, strategy and information management for many leading organizations. As global CIO of NYSE Euronext, he is responsible for most of the company’s technology endeavors. Rubinow’s former roles include Chief Technology Officer of Archipelago Holdings, Senior Vice President and Chief Information/Technology Officer at NextCard, Inc., and Vice President of Corporate Management Information Systems at Fidelity Investments.

“Steve is a visionary in the IT industry and we are honored to have him share some of his knowledge in developing strategic IT environments that really help drive business efficiency,” said Jim Whitehurst, president and CEO at Red Hat. “NYSE Euronext is a shining example of extraordinary innovation in challenging times. I look forward to Steve’s involvement at Red Hat Summit.”

Now in its fifth year, Red Hat Summit is an annual conference that brings together business decision makers, engineers, developers and community enthusiasts from around the world. Attendees will learn about the latest open source advancements from Red Hat solutions and JBoss Enterprise Middleware technologies. Co-located for the first time this year with JBoss World, the Red Hat Summit will take place in Chicago, Sept. 1-4, 2009. The co-location of Red Hat Summit and JBoss World will provide attendees with the unique ability to move between both conferences with one pass, offering the opportunity to gain increased knowledge across the entire application stack.

For more information or to register for the 2009 Red Hat Summit or JBoss World, please visit www.redhat.com/summit or www.jbossworld.com.

To learn more about the results NYSE Euronext has achieved using Red Hat products and technologies, please visit http://customers.press.redhat.com/2008/05/12/nyse/.

From the Red Hat press release:

NYSE Euronext Co-CIO to Deliver Keynote at 2009 Red Hat Summit

Steve Rubinow to share strategy of building one of the world’s most mission critical IT environments with open source

RALEIGH, NC - May 27, 2009 - Red Hat, Inc. (NYSE: RHT), the world’s leading provider of open source solutions, today announced that Steve Rubinow, co-global chief information officer at NYSE Euronext, will keynote at the 2009 Red Hat Summit.

NYSE Euronext (NYX) operates the world’s largest and most liquid exchange group. With over 8,000 listed issues globally, NYSE Euronext’s equities markets represent nearly 40 percent of the world’s cash equities trading volume, the most liquidity of any global exchange group. NYSE Euronext unifies six cash equities exchanges in five countries and six derivatives exchanges. It strives to provide the highest possible market quality, innovation and customer choice.

NYSE Euronext must meet and exceed daily IT demands to handle heavy workloads while producing fast-paced performance results across its global systems. With its cutting-edge IT strategy, led by Rubinow, it has brought the exchange group to the forefront of elite IT innovation with systems that push the highest speed, scalability and performance expectations.

“Due to the mission-critical nature of our infrastructure to our business and that of our customers, NYSE Euronext seeks to deliver optimal uptime and system performance,” said Rubinow. “I’m looking forward to sharing our open source strategy with people at the Red Hat Summit and discussing our approach to innovation in a high pressure environment.”

Rubinow has decades of experience in the information technology industry, leading technology innovation, strategy and information management for many leading organizations. As global CIO of NYSE Euronext, he is responsible for most of the company’s technology endeavors. Rubinow’s former roles include Chief Technology Officer of Archipelago Holdings, Senior Vice President and Chief Information/Technology Officer at NextCard, Inc., and Vice President of Corporate Management Information Systems at Fidelity Investments.

“Steve is a visionary in the IT industry and we are honored to have him share some of his knowledge in developing strategic IT environments that really help drive business efficiency,” said Jim Whitehurst, president and CEO at Red Hat. “NYSE Euronext is a shining example of extraordinary innovation in challenging times. I look forward to Steve’s involvement at Red Hat Summit.”

Now in its fifth year, Red Hat Summit is an annual conference that brings together business decision makers, engineers, developers and community enthusiasts from around the world. Attendees will learn about the latest open source advancements from Red Hat solutions and JBoss Enterprise Middleware technologies. Co-located for the first time this year with JBoss World, the Red Hat Summit will take place in Chicago, Sept. 1-4, 2009. The co-location of Red Hat Summit and JBoss World will provide attendees with the unique ability to move between both conferences with one pass, offering the opportunity to gain increased knowledge across the entire application stack.

For more information or to register for the 2009 Red Hat Summit or JBoss World, please visit www.redhat.com/summit or www.jbossworld.com.

To learn more about the results NYSE Euronext has achieved using Red Hat products and technologies, please visit http://customers.press.redhat.com/2008/05/12/nyse/.

The Wall Street Journal today noted the fact that “Whether due to layoffs, attrition, retirement or brokerage firms moving analysts around, Wall Street’s map of corporate coverage is shrinking these days.” While the decline of analyst coverage affects companies of all sizes, it is especially hard on small and micro cap stocks. According to the same article, between September 2008 and now, over 25% of research on small cap companies was dropped. For a group that is traditionally under-covered, this kind of loss is drastic.

As our customers know, public companies will have to find unique ways of reaching investors, especially if the analyst slide continues. We see Virtua Research as one piece of that puzzle. NYSE.com now contains a financial modeling tool for select NYSE and NYSE Amex companies. The web-based, interactive financial model, created by Virtua Research, enables investors to create their own financial analysis of the company, providing unique analytical insights and capabilities to investors.

We are excited about the potential of this tool. Check out the companies currently covered. There are many more to follow!

My colleagues on the futures side of our business tell me this press release represents a significant announcement for us. We’re:
• Expanding our U.S. futures business beyond gold and silver futures;
• Partnering with MSCI, a leader in the field of indices;
• Offering a suite of brand-new, stock-index products;
• Complementing the liquidity on the NYSE Arca platform in ETFs based on MSCI indices;
• Moving two of the MSCI index futures from the Chicago Mercantile Exchange in 2010; they will be dual listed until then; and
• Becoming more competitive and creating a U.S. futures exchange with a unique value proposition to firms, customers and the public.

Here’s a Wall Street Journal online article about the news.

From the press release:

NYSE Liffe US, the new U.S. futures exchange of NYSE Euronext (NYX), today announced that it has signed a license agreement with MSCI Inc. (NYSE: MXB), a leading provider of investment decision support tools worldwide, to introduce a suite of domestic and international index futures products built on a range of MSCI Equity Indices. This unique and extensive portfolio of MSCI linked stock index futures will provide broad and efficient market coverage of U.S. and European equity markets, including style and sector exposures as well as coverage of flagship MSCI indices such as the MSCI Emerging Markets (EM), MSCI EAFE, and MSCI BRIC Indices.

These products represent NYSE Liffe US’ entry into a new asset class beyond the initial gold and silver contracts it opened with in September 2008. MSCI, which calculates over 120,000 equity indices daily, introduced its global equity benchmarks over 40 years ago. Today, the indices are recognized and used by leading asset managers around the world.

“This license agreement marks the beginning of a substantial commitment between two industry leaders in MSCI and NYSE Euronext to develop innovative products serving the needs of the global investment community,” said Duncan L. Niederauer, CEO, NYSE Euronext. “This exciting set of products fits strategically with NYSE Liffe US’ evolving value proposition and our commitment to building a premier US futures exchange.”

Henry Fernandez, Chairman and CEO, MSCI Inc., said, “We are very excited by this development. Over the last 40 years MSCI has built a successful franchise and an internationally recognized index brand. Our market-leading range of global investable and replicable benchmark indices is now an integral part of the investment processes of thousands of institutional investors around the world. By licensing a global exchange group like NYSE Euronext, many more investors will be able to access the MSCI Equity Indices via the futures marketplace.”

“In addition to the tremendous liquidity available on the NYSE Arca platform in ETFs based on MSCI indices, and combined with the margin efficiencies available at OCC, the MSCI family of indices are a natural and exciting core product set for NYSE Liffe US,” said Thomas F. Callahan, NYSE Euronext Executive Vice President, Head of U.S. Futures. “Adding futures products based on the MSCI EM and MSCI EAFE Indices to NYSE Liffe US is the first of many innovative futures products that we plan to introduce in the months ahead. NYSE Liffe US delivers credibility and innovation along with the liquidity, functionality and cost effectiveness that our clients demand.”

“We are delighted to have licensed NYSE Liffe US for the creation of futures contracts based on the MSCI Equity Indices,” said David Brierwood, Chief Operating Officer, MSCI Inc., “The availability of derivatives based on MSCI indices provides investors around the world with flexible tools to more effectively manage their equity portfolios.”

NYSE Liffe US launched trading in September 2008 as a fully electronic, liquid market for 100 oz. gold futures, 5,000 oz. silver futures, options on gold and silver futures, and mini-sized 33.2 oz. gold and 1,000 oz. silver futures. NYSE Liffe US utilizes the proven LIFFE CONNECT® trading platform designed and maintained by NYSE Technologies.

In the two-sides-to-every-story context, two letters representing the views of hundreds of NYSE floor brokers were sent to the Wall Street Journal to add a bit of balance and reality to an article that appeared in the newspaper’s May 4 edition. The Journal has not printed the letters, and since we feel it’s a story worth telling, here are the letters. Feel free to weigh in, as the vast majority of NYSE floor brokers are proud of what they do for their customers.

In response to Mary Pilon’s article, “The Big Bored: NYSE Traders Look For Diversions as Life Slows on Floor” (May 4), the Organization of Independent Floor Brokers (OIFB) would like to offer a very different and dynamic picture of today’s NYSE trading floor.

The NYSE is an enduring symbol of the American economy. During the last three years, however, there has been a metamorphosis of the NYSE trading floor. The technology has changed, the market model has changed, and as we all have witnessed, the economy has changed. The majority of the NYSE floor based businesses have embraced these changes. Our business models have continuously evolved to better serve the investing public.

Ms. Pilon has chosen to focus on the woes of a small percentage of our community rather than the successful businesses that our members have built. After interviewing a cross-section of our community Ms. Pilon chose to incorporate only the comments that served her negative bias. She portrayed us as a community of pathetic, movie watching, lamenters of the past. Quite to the contrary, we are experienced business owners and practitioners who keep a constant eye to the future. Our businesses are successful, consisting of strategically positioned execution platforms. We spend our days involved in the diverse demands of business and are not “flat out bored.”

We are extending an open invitation to any member of the press to spend time with us on the trading floor. We are eager to display our professional attitude and acumen. Finally, we are determined that we, the human part of today’s marketplace, will evolve, prosper and continue to be an integral part of the world’s capital markets for the foreseeable future.

Jonathan D. Corpina - President, OIFB
Jennifer I. Lee - Vice President, OIFB
Stephen O’Shaughnessy — Board Member, OIFB

This letter is in response to the page one article entitled “The Big Bored: NYSE Traders Look for Diversions as Life Slows on Floor.” Unfortunately the reporter, Ms. Pilon, interviewed a small group of our community and grossly overstated the current situation. The floor now consists of Designated Market Makers (DMMs), House Brokers, and Independent Brokers. Ms. Pilon incorrectly described the community as being left behind the times by the increase in electronic trading. We have faced enormous challenges to our core business models over the last five years, yet we have found a way to adapt, survive and even thrive in this new trading environment.

Some of the more recent regulation changes including NMS forced our quotes to be electronically accessible which changed most of the trading that takes place on the floor from manual to electronic. Automation thins the numbers in any business, but with all change comes opportunity. It is true that our busiest time of day is during the open and close. Those prices, which are the standard to the entire financial industry, need to be manual transactions. Brokers and DMMs work hard each morning to “get the price right” by representing large institutional and retail order flow. While the floor seems quiet after the opening prints, it is also true that brokers have adapted to the new market structure.

True price discovery is still best accomplished by focusing supply and demand information to a single point of sale. Throughout the day brokers are finding innumerable ways to add value through price discovery and execution capability both electronically and manually.

Brokers on the floor still offer more information at the point of sale than any ECN could ever provide. Our community also has embraced the electronic world by creating a New Market Model in which agents (brokers) marry the benefits of parity with multiple order types and algorithms. This ability makes our marketplace truly unique. DMMs have replaced the specialist community and are finding new ways to show liquidity to institutional customers who seek blocks of stock. DMM participation is up over the last few months and the quality of our market place has grown stronger.

There may be some within our community that wish for it to return to the glory years of manual transactions and eighty percent market share. However, the financial community should know that the floor is here to stay. We have reinvented our business models and you would be remiss to ignore what we have to offer.

Patrick Armstrong
Daniel Tandy
Co-Presidents
Alliance of Floor Brokers