Backlash of the Titans

If you can’t run with the big dogs, stay on the porch. It’s one of those idioms that exalt the conspicuously massive, enticing us to celebrate the all-or-nothing spirit of those who dominate.

But big isn’t as easy as it used to be. The U.S. Securities and Exchange Commission is looking into the possibility that some of the big exchanges may have unfairly benefitted their titan clients by spreading out massive orders over numerous smaller exchanges, circumventing discrimination rules.

“All major U.S. exchanges operate multiple markets,” wrote The Financial Times on Sunday. “They are often the legacy of acquisitions and use different pricing schemes or trading systems.”

Of course, there are still plenty of reasons for exchanges to get bigger, such as the London Stock Exchange’s recent agreement to take control of London-based clearing house LCH.Clearnet Group. “A successful acquisition is considered critical to the LSE’s future competitiveness,” Finextra wrote of the deal last week.

And partnerships with foreign exchanges offer esteem and liquidity to developing markets, in addition to round-the-clock trading opportunities to American investors, Matthew Simon wrote on capital markets discussion site TabbFORUM last week. But Simon uses CME Group’s foreign deals as a cautionary tale.

“The track record CME has been building is pretty unbelievable, and each market that is tapped into is another example of the U.S. global footprint expansion,” Simon wrote. “As these agreements are entered and partnerships struck, other exchanges and markets should be taking notice.”

How does a power grab like that escape notice?

Before the crisis of 2008, financial institutions around the globe would have crawled over, under and through each other for a designation as a “systematically important financial institution,” or SIFI. But today, the Dodd-Frank-inspired euphemism for “too big to fail” conjures fears of added scrutiny, tighter regulation and capital surcharges, not to mention the stigma of being a potential depression-inducing behemoth.

So as big banks and critics of the Capitol Hill SIFI hunt worry that regulators will overstep their bounds, reform advocates are concerned that new measures don’t do enough. Meanwhile the exchanges are playing it cool, and with good reason.

“Any kind of designation is going to have a profound impact,” Alice Joe, executive director for the Chamber of Commerce’s Center for Capital Markets Competitiveness, recently told D.C. political publication The Hill. “There’s a huge, huge cost in becoming a designated SIFI.”

So where is the backlash of the titans? The exchanges seem cooperative so far.

For one, there’s no reason to cause a ruckus. Protesting as loudly and publically as the banks would only draw attention to the exchanges in a world where furtive dealings can keep big clients happy -- and being noticeably big yourself is not an asset.