Feb 1, 2023
NYSE Glitch Caught Up in Fight Over SEC Rewrite of Trading Rules
(Bloomberg) -- Last week’s glitch at the New York Stock Exchange has become a pawn in the ongoing battle over a rewrite of stock-trading rules proposed by US regulators.
The manual error, which caused wild market swings when trading opened on Jan. 24, is now being cited as an example of why more trading shouldn’t be pushed onto exchanges such as NYSE and Nasdaq Inc. Major broker-dealers Charles Schwab Corp. and Robinhood Markets Inc. contend that the incident was a reason for concern and an argument against exchange-run auctions.
“If exchanges will not accept accountability when they make an obvious mistake, it further heightens our concerns that routing even greater levels of retail orders to the exchanges will dramatically reduce the quality of the investing experience for America’s retail investors,” Charles Schwab spokesperson Mayura Hooper said in an emailed statement after the NYSE mishap.
The proposals from the US Securities and Exchange Commission call for an auction model that would route more trades to exchanges rather than wholesalers such as Citadel Securities and Virtu Financial Inc., with investors intended to benefit. The changes would affect everyone, including wholesale firms, exchange operators and retail brokers who receive payment for sending their order flow to get processed.
Backers of the SEC’s proposals contend that the NYSE mishap is being co-opted by firms to advance their own agendas.
“Anyone who’s kind of casting this as a concern about exchange auction mechanisms is only doing so because they don’t want to see the order-competition rule in place because they stand to lose money,” said Dave Lauer, chief executive officer of Urvin Finance, a social-networking and market-information platform for retail investors.
A competitive-auction system, with multiple auction venues, would withstand trading halts or other market problems, Lauer said. “It’s resilient to an individual exchange going down.”
An NYSE representative declined to comment Wednesday, and the SEC didn’t immediately respond to a request for comment.
The glitch at the NYSE was the result of human error and resolved by the end of the trading day. While the exchange canceled some trades made during the erratic price swings spurred by the mishap, retail investors stand to lose money on trades that remained in place.
Hooper, the Charles Schwab representative, said the firm was disappointed by NYSE’s handling of the problem, and that retail investors had “to go through a lengthy process to correct orders, with no guarantee of a reasonable outcome.” A Robinhood spokesperson said that “this event and similar issues in the past further warrant against adoption of the SEC’s proposal mandating that all retail orders be executed in exchange-run qualified auctions.”
Auctions run by exchanges are subject to myriad rules, and problems like last week’s glitch are exceedingly rare, said Tyler Gellasch, president and CEO of the Healthy Markets Association, a trade group representing pension funds, endowments and other institutional investors.
“We have not seen widespread failures of those auctions,” he said, and claims that the NYSE mishap shows the shortcomings of the SEC proposal “are disingenuous at best.” While the human element always risks things going wrong, auction rules and procedures have dramatically reduced the frequency of such errors, he said.
When the SEC proposal was first unveiled in more than 1,000 pages of suggested changes, NYSE Chief Operating Officer Michael Blaugrund said the exchange “supports equity-market structure reform to benefit public investors and we are encouraged that the SEC’s proposals aim to level the playing field between on- and off-exchange trading.”
Others, including Charles Schwab and Robinhood, said the changes potentially threaten the current ecosystem.
“The SEC should not be playing politics with individual Americans’ ability to improve their financial lives,” Lucas Moskowitz, deputy general counsel at Robinhood, said at the time.
The commission is taking comments from interested parties through March. SEC staff will then take those recommendations and write a final plan that commissioners will have to approve before any new regulations take effect.
“This whole issue comes down to liability — who is on the hook when something goes awry,” said Larry Tabb, a Bloomberg Intelligence market-structure analyst. “Currently exchange liability is capped, and we’ve seen this occur in the past and last week. The SEC needs to revisit the issue of the cap if they want this auction proposal to go through smoothly.”
©2023 Bloomberg L.P.