Grasso to FBN: Regulations Created Market 'Free for All'

Government regulations initiated a decade ago that allowed stock trading to become dispersed across an array of electronic trading platforms has lowered the cost of trading for investors, but hasn’t made pricing more efficient, former New York Stock Exchange Chairman Richard Grasso said on FOX Business Network Thursday.

In other words, the cost of conducting a trade may be cheaper than it was 10 years ago, but investors may not be getting the best price available, Grasso told FOX Business Network’s Maria Bartiromo.

Grasso said the shift to electronic trading platforms is also primarily responsible for draining the floor of the NYSE of traders. A decade ago more than 5,000 people bustled among five rooms on the floor of the venerable exchange. Today that number has dwindled to about 300.

“Technology obviously displaced a lot of the people,” Grasso said. “What unfortunately also happened was some very bad regulatory decisions in the period ‘05 to ‘08 which basically said the new national market could convert from a free market process to a free-for-all market process.”

“You are getting cheaper executions,” he added. “But there’s a difference between speed cost and quality.”

Grasso’s comments come two weeks after a computer glitch shut down the NYSE’s trading platform for about three hours.

The shutdown raised two important issues that contradict each other in some ways. Initially, there was concern that a computer glitch shutting down the U.S. was a frightening event that would send shockwaves through securities markets. But that wasn’t the case. Trading went on basically unimpeded when all of the NYSE’s trades were moved to other trading platforms.

The Wall Street Journal reported Thursday that the NYSE and the Nasdaq stock market, ostensibly rivals, have agreed to back up each other’s closing auctions in the event of another shutdown.

Nasdaq OMXC CEO Robert Greifeld, speaking to FOX Business Network’s Neil Cavuto, confirmed the agreement but noted that in today’s investing landscape all stock markets are competitive with one another.

“It’s meant to be a competitive market today,” he said, noting that the Nasdaq is a publicly traded company itself and therefore accountable to its shareholders.

Referring to the NYSE shutdown, Greifeld said, “We were sympathetic to their pain.”

Grasso said cooperation among the various exchanges is the key to ensuring that investors get the most efficient pricing, not just the cheapest trade execution.

“Today IBM trades in 60 different locations,” Grasso said. “Nobody can tell me what the last sale of IBM is. No one can tell a small customer you got the best execution at the time you bought it or you sold it, and that’s a crying shame. I’m not arguing to put 5,000 people back on the trading floor. I am arguing that the regulators have fallen down by not mandating the ability to know the highest bid(and) the lowest offer.”

Best execution was once a top priority, but now it isn’t, Grasso said.

The best way to ensure best execution is “by linking these 60 different entities. String the data to one central vendor: the fully disclosed, the semi-disclosed and the non-disclosed,  So the public can say, ‘the highest bid, I hit it, lowest offer, I take it.’