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MFDF - Mutual Fund Directors Forum - An Argument for Exchange Exclusivity

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An Argument for Exchange Exclusivity

Jonathan Macey, a Yale law professor, and David Swensen, Yale’s Chief Investment Officer, acknowledge issues presented by today’s fragmented markets, payment for order flow, and high frequency traders. However, in a recent op-ed for the Wall Street Journal, they argue that consolidating markets “is worse than the disease, because consolidation will eliminate competition, stifle innovation, raise transaction costs and produce subpar performance.”

Instead, they argue the solution is to have multiple (perhaps 10) trading venues that each provide a centralized and exclusive venue to trade securities listed on that exchange. Exchanges would thus be “large enough to benefit from scale, yet numerous enough to compete for listings.” Further, directors or shareholders themselves through the proposal process should be able to change the company’s listing exchange by a vote. This would allow “shareholders—who, after all, care deeply about trade execution and liquidity—to achieve for themselves the best trading results.” Macey and Swensen argue that their solution would encourage greater competition between the exchanges for advanced technology and efficiency, “increase market depth and liquidity, eliminate deadweight loss from arbitrage by HFTs, increase transparency and return competition to secondary market trading in equities.”