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NYSE's Chicago Takeover Perpetuates Fragmentation by Consolidation – Traders Magazine

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Traders Magazine Online News, April 17, 2018

Don Ross

The recent announcement that the Intercontinental Exchange (ICE), owner of the New York Stock Exchange, would buy its comatose Chicago counterpart (CHX) appears on its surface to herald the inevitable and final technology-driven consolidation of the traditional U.S. exchange business.  The Chicago Stock Exchange is the last of the so-called regionals to be swallowed up, like the Boston, Philadelphia, and Pacific exchanges before it, by one of the big conglomerates.  Yet it is set to perpetuate a very different trend, driven by perversities in well-meaning but misguided regulation: fragmentation.

Since the 1970s, the Securities and Exchange Commission has had the integration of the U.S. equities markets as a primary mission—one imposed on it by Congress.  It achieved this integration, on the surface, by mandating electronic linkages among exchanges.  What it has done in practice, however, is to stop consolidation in its tracks.  By providing legal protection to the best bid and offer on each exchange, a small and arbitrary part of their order books, it has kept their emaciated bodies on life support.  Irrespective of the networking cost to the consumers of trading services, those trivial quotes cannot be ignored—they have to be treated as if they are unique liquidity pools that would not exist outside their brain-dead hosts.  All of us in the markets know this is nonsense, and costly nonsense at that, but we have to play along for the greater good—meaning, of course, protecting the SEC from Congress.

Fast forward to the latest “consolidation” event, and consider what is actually going on.  ICE is expected to pay about $70 million for CHX, or $50 million more than a Chinese conglomerate was willing to pay.  And for what?  For valuable technology?  Intellectual property?  Real estate?  None of the above.  It is buying an exchange license, which is a legacy asset from the long bygone days when the Chicago Stock Exchange did something useful for the country—provide liquidity to investors in the Midwest.  Now, it is a license to print money—or, more precisely, a license to extract money from prints.

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