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January 7, 2013

Why the NYSE merger may hurt average investors


“Observers have long been worried about the New York Stock Exchange’s ability to police stock trading so that it’s fair for all investors. The acquisition by the InterContinental Exchange (ICE), which in late-December agreed to buy the NYSE (NYX) for $8.2 billion, may make matters worse.”

“Historically, the NYSE has been what’s called a self-regulating organization. The Securities and Exchange Commission looks over its shoulder, but basically the NYSE is in charge of what goes on on its exchange. It creates and enforces the rules, and makes sure they don’t favor some investors – namely the large banks – over others.”

“The challenge for self-regulatory organizations is balancing the public interest and the economic interest of its members,” says Joel Seligman, who is the President of the University of Rochester and an expert on the NYSE and regulation. He is also a board member of FINRA, a member organization that regulates brokerage firms. “The NYSE has done a good job of this, but some organizations have done a better job of the balancing act than others.”


“Dennis Kelleher, who runs investor advocacy group Better Markets, says those four banks have a large influence over ICE. Even after ICE adds the NYSE’s significant stock business, ICE will still make the bulk of its profits in derivatives. The worry is that the banks might use their influence over ICE to tilt the rules that govern stock trading at the NYSE in their favor, hurting individual investors.”

“ICE has been accused of collusion before. Competitors such as Bank of New York Mellon and Newedge have complained that ICE and its largest customers – namely those four large banks – have sought to restrict competition. Kelleher and others have said this may be leading to worse prices for investors and users of derivative contracts, which companies buy to hedge everything from energy prices to the risk that one of their suppliers could go out of business.”

“It must never be forgotten that the history of these markets is a history of anti-competitive, self-interested, predatory conduct that serves the interest of the exclusive few at the expense of the many and the system as a whole,” wrote Kelleher in a comment letter to the Securities and Exchange Commission on how proposed rules in Dodd-Frank should be applied in the derivatives market.”


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