Focus on potential market-changing rules as stock exchange officials meet at Piper Conference

Gary Gensler, chair of the Commodity Futures Trading Commission (CFTC), listens during the Financial Stability Oversight Board (FSOC) meeting at the US Treasury in Washington, DC, US, on Monday, December 4. 9, 2013.

Andrew Harrier | Bloomberg | Getty Images

We live on Wednesday at Piper Sandler’s Global Exchange Conference, where the heads of major exchanges, trading desks, fintechs, and cryptocurrency (both physically and remotely) will gather.

Speakers include Interactive Brokers CEO Thomas Peterffy, Robinhood CEO Vlad Tenev, Virtu CEO Doug Cifu, CEO Charles Schwab Walt Pettinger, CME President Terry Duffy, Intercontinental Exchange President Jeffrey Sprecher, CEO For Nasdaq Adena Friedman.

Crypto providers such as Michael Novogratz, CEO of Galaxy Digital Holdings are also speaking out, and increasingly seeking greater influence with exchanges.

Securities and Exchange Commission Chairman Gary Gensler will give the headline and is expected to bring forth new payment processing proposals for order flow.

But there’s a bigger issue on the minds of stock exchange chiefs: Are there tough times ahead for business?

Will the giant trading volumes continue?

The exchanges were driven by trading volumes, and business was on hold. Since Covid, daily stock volumes have nearly doubled, from about 7 billion shares a day to nearly 14 billion shares.

why? First, the $0 commissions were a boon for trading. Second, higher volatility usually increases trading volume, which we saw in abundance during 2020 and 2021. Third, most of the uptick in trading was initially due to increased retail activity. That slowed during the market downturn in 2022, however, and institutional orders took up much of the slack. Trading in stock options and futures is also higher.

will you continue Stock prices on major exchanges have fallen this year on concerns that the macro environment will deteriorate later this year and retail interest will wane further. A slowdown in the economy, especially a recession, will not be good for trading volume.

It doesn’t help that the competition gets tougher. Two new exchanges were launched in 2020, namely the Member Exchange and the MIAX Pearl Stock Exchange.

This led to intense price competition. In response, exchanges are turning to other sources of revenue, such as charging for data, which is now an important part of the revenue streams for both ICE (NYSE) and Nasdaq.

Gensler wants changes

Giving the headline on day one, Gensler will take the opportunity to propose changes to the existing order flow payment system, where brokers send their orders to market makers in exchange for payments. This enables some brokers to charge zero commissions. There may be a conflict of interest for brokers, Gensler said, and that a lot of power is concentrated in a handful of market makers. Gensler is likely to put forward proposals that would reduce the influence of wholesale market makers such as Virtu and Citadel Securities.

However, the industry is likely to resist major changes. They will ask for data from Gensler indicating that the current system is down and that retailers are really disadvantaged.

“These same wholesalers have a very good argument that paying for the order flow has brought commissions down to zero,” Amy Lynch, president of Frontline Compliance and a former SEC compliance officer, told CNBC.

“The SEC may succeed in restructuring how payment for order flow works, and how it is disclosed, but it will not eliminate it completely because it is such an integral part of a source of income for brokers,” she said.

High volatility requires more electronic trading

There is likely to be a lot of discussion about the liquidity of the bond market.

High volatility is a boon for online platforms like MarketAxess and Tradeweb, which have seen their share of bond trading increase in recent years. However, spreads on corporate bonds have widened, and US companies are paying more to borrow money. New releases are lower, and prices are under pressure.

Settling the issue of cipher regulation

Crypto providers spoke at this conference several years ago, but exchanges have been reluctant to dive into crypto in large part due to regulatory skepticism and influence wars between the CFTC and the Securities and Exchange Commission.

However, the bill introduced Tuesday by Senators Kirsten Gillibrand and Cynthia Lummis is a step toward resolving that mystery. It will classify digital assets as a commodity and grant initial regulatory control to the CFTC, a move that cryptocurrency speakers at the conference are likely to welcome.

Many in the crypto community were so nervous about Gensler, who refused to approve a pure Bitcoin ETF. They came to believe that regulation under the CFTC would be much less expensive than under the SEC.

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