Nasdaq, SIFMA at odds over Bats ‘market close’ proposal


June 14, 2017

Nasdaq and SIFMA have taken opposing positions on a proposal by Bats BZX Exchange to create a new order type that would allow brokers to buy or sell a security on BZX at the official closing price published by either the New York Stock Exchange or Nasdaq, depending on where the security is listed. In a comment letter filed with the SEC, SIFMA stated that the proposal would increase price competition and resiliency in the closing auction process while maintaining the price discovery role that closing auctions play. Nasdaq, on the other hand, accused Bats of impeding market transparency and price discovery while "free-riding" on the investment that the listing markets have made in their closing auctions.

Market close proposal. According to the proposal filed by Bats with the SEC, the rule change responds to interest from market participants who are seeking an alternative to participation on the primary listing market’s closing auction while still receiving an execution at the official closing price. The proposal notes that the total volume executed in the primary listing markets’ closing auctions increased over 70 percent from 2012 to 2016. As volume executed in the primary listing markets’ closing auctions has increased, however, both the NYSE and Nasdaq have taken advantage of this demand by imposing disproportionate increases in fees.

The Bats proposal, therefore, seeks to provide investors with alternative venues for securing the official closing price for listed securities but at a lower cost. Under the proposal, Bats Market Close would seek to match buy and sell market close orders for non-BZX listed securities at the official closing price published by the primary listing market. At the cut off time of 3:35 p.m. Eastern time, the BZX system would match for execution all the orders entered into the system based on time priority. Any remaining balance of unmatched shares would be cancelled back to the exchange member.

SIFMA comments. SIFMA has supported the Bats proposal, attributing the steady increase in trading costs associated with the primary markets closing auctions to an absence of competitive alternatives. In SIFMA's view, the proposal likely will not disrupt price discovery, particularly because BZX would publish the number of matched market orders shares by security in advance of the primary market’s cutoff time. SIFMA also believes the proposal can enhance the resiliency of the closing auction process by providing an additional mechanism for market participants to execute their market orders at the official closing price should a disruption occur at the primary listing exchange.

Nasdaq comments. Nasdaq, however, blasted the proposal, saying that allowing Bats to implement the new order type would undermine the primary market close with no apparent regard for the impact on issuers or their shareholders. Perhaps this is unsurprising, Nasdaq noted dryly, since Bats lists no operating company other than itself that would be impacted by its own proposal.

According to Nasdaq, the Bats market close order would increase the amount of risk and uncertainty associated with trading during the closing auctions by netting market orders, thereby concealing from auction participants the gross amount of liquidity demand during the auction process. Eroding investor confidence in the primary market closing price could create a vicious cycle in which liquidity is diverted from the primary market closing cross, reducing its effectiveness and leading to further reductions in orders to the primary market close.

Rather than invest and innovate to benefit issuers and investors as Nasdaq and NYSE have done, Bats has opted to free ride on those efforts in a way that undermines the quality of trading to the detriment of issuers and investors, according to Nasdaq. Whereas the competition that occurs during a closing auction promotes both price discovery and transparency, Nasdaq stated, the Bats market close orders would contribute nothing to price discovery and fragment the market by drawing quotations and orders away from the primary markets’ centralized closing auctions, thus undermining the mechanisms by which closing list prices are set. While claiming to promote inter-market price competition, Bats would be harming intra-market order competition and interaction and reducing confidence in the primary market close, Nasdaq wrote.

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