A comparative analysis of the US and EU retail banking markets - Wsbi

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■ The Quote Rule The objective behind the quote rule was to ensure that no significant pools of liquidity are hidden from the market. The Quote Rule requires market makers to make their prices public, which would ultimately enable wide dissemination of information in the form of a consolidated quote. By including all the quotes for securities into the consolidated quotation system, market transparency increased and investors became able to make a better informed investment decision. The rule was introduced in 1996 following severe deficiencies discovered on the NASDAQ market. The SEC accused NASDAQ of inadequate reporting of trading intentions which occurred due to the fact that under the NASDAQ rules the market makers were not obliged to incorporate limit orders into their quotations even if these were better than the best available price 212 . This was deemed as a serious lack of representative information, having in mind that the limit orders constitute two-thirds of all orders on NASDAQ 213 . The Quote Rule was introduced in 1975 and complemented with two amendments in 1996. The first one broadened the scope of the rule by modifying the definition of OTC market maker, which came to include investment firms which act on their own accounts and which internalise orders 209 . This applies to all bids and offers which they gather from the market for any listed security when a quotation represents more than 1% of the aggregate trading volume for that security. The other amendment allowed market makers to trade at better prices in certain private trading systems, called electronic communication networks (ECNs), without publishing an improved quote (provided that the ECN itself publishes the improved prices). ■ The Order Display Rule The Order Display Rule requires the investment firms covered by the rule 210 to publicly display those limit orders received from clients which have better prices than their own prices 211 . Market makers have three options on how to comply with the rule: they can display in their quotes these customer limit orders that improve the price or add to the size of their quotes, they can execute the limit order themselves or they can transfer the order to another authorised market maker. According to a SEC study published some years after the implementation of the rule, it is estimated that the spreads in NASDAQ stocks had narrowed by 30 percent after implementing the Order Handling Rules and that more than half of the decrease in spreads was due to the Order Display Rule 214 . 4.3.2.2.3 Market interconnection Numerous IT systems have been put in place over time to ensure that a customer is aware of the best available prices, although the existence of different types of trading venues hindered the creation of a single network. As securities were traded on separate markets and under separate rules for a long time, the need to link the markets did not exist 215 . Due to technological developments, by 1975 it became feasible to link nine markets by ITS computers, enabling traders to seek the best available price on all the connected markets, however leaving all the unlisted stocks (including those traded on NASDAQ) out of the NMS scope 216 . The practical implication of such segregation was that investors still faced certain risks as they could not compare prices on all markets. 209 Over The Counter (OTC) market makers trade securities over the phone, facsimile or electronic network instead of a physical trading floor. 210 Specialists and OTC market makers. 211 Limit order is an order to buy or sell a predetermined amount of shares at a specified price or better price. 212 US SEC, «Report pursuant to Section 21(a)of the Securities Exchange Act of 1934 Regarding the NASD and the NASDAQ Market», August 1996. 213 US SEC, «SEC Study Reveals Problems In Display Of Limit Orders», 4 May 2000. 214 US SEC, «SEC Study Reveals Problems In Display Of Limit Orders», 4 May 2000. 215 A clear distinction was traditionally made between the listed securities which are the ones that are traded on a recognised and regulated exchange, and unlisted securities which are not traded on a regulated exchange (but for example those traded in the OTC market). 216 The linked markets were American, Boston, Cincinnati, Chicago, New York, Pacific, and Philadelphia and NASD over-the-counter market. In turn, NASDAQ quotes are operated through another type of specialised systems. 68
4.3.2.2.4 National Market System rules ■ The Order Protection Rule In 1975 the SEC has been mandated by the Congress to use its rulemaking authority to develop an efficient New Market System for equity securities. The SEC was assigned with a power to “eliminate all unnecessary or inappropriate burdens on competition, pursue the goal to centralised trading of securities and provide leadership for the development of a more coherent and rational regulatory structure to correspond to and to police effectively the new national market system” 217 . The Congress furthermore encouraged the SEC to "assure economically efficient execution of securities transactions, fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets" 218 . To improve the functioning of financial markets and to protect investors, the SEC adopted the NMS regulation in April 2005 after years of extensive consultations with the industry 219 . The regulation was considered necessary to respond to the numerous changes that were noted on the equities markets in the last few years, as a result of new technologies, new market participants and new types of markets. According to the SEC, the NMS today encompasses stocks of “more than 5,000 companies, which collectively represent more than $14 trillion in US market capitalisation (approximately €11.5 trillion)” 220 . Once the Regulation NMS enters into force the two biggest US stock exchange markets, the NYSE and NASDAQ, will become subject to a common set of rules, but without a tendency to merge their structures in one. This is a significant step forward for exchanges which have traditionally operated on completely different platforms, the former with the physical auction trading floor where buyers and sellers meet directly and the latter with an electronic platform. The NMS Regulation includes four straightforward rules which are designed to modernise the regulatory structure of the US equity markets: the order protection rule, the access rule, the sub-penny rule and the market data rules. Some of the rules existed before, but had a more limited scope, while the others are a response to new market developments. The Order Protection Rule is designed to protect displayed and immediately accessible automated quotations from trade-throughs for all types of NMS stocks (i.e. NYSE-, Amex- and NASDAQ-listed stocks) 221 . It should be noted that the trade through rule was already applicable on NYSE, but the Regulation NMS brought in certain improvements and extended the scope of the rule so that it now also applies to NASDAQ. The rationale behind the rule is to ensure fair market practice and increase protection of investors, who are often unaware that their orders have not been executed at best available prices. A SEC study found that trade-trough became a rather frequent practice on the US market, namely that “1 out of 40 trades for both NYSE and NASDAQ stocks were executed at prices inferior to the best displayed quotations, which amounts to approximately 98,000 trades per day in NASDAQ stocks alone” 222 . ■ The Access Rule The Access Rule requires trading centres to ensure fair and non-discriminatory access to quotations through a private linkage approach, so that investors benefit from the possibility of indirect access through the members, subscribers, or customers of a trading centre in question. In addition, the rule establishes a limit on access fees to harmonise the pricing of quotations across different trading centres. Furthermore, SROs (Self Regulatory organisations) became obliged to enforce rules which would prohibit their members to display quotations that lock or cross the automated quotations of other trading centres (this however does not apply to manual quotations). ■ The Sub-Penny Rule The Sub-Penny Rule prohibits market participants to display, rank or accept quotations in NMS stocks that are priced in an increment of less than $0.01, unless the price of the quotation is less than $1.00 (in that case the minimum increment is $0.0001). This rule aims to prevent the practice of “stepping ahead”, i.e. prevent displayed limit orders to be exceeded by negligible amounts. 217 New York Court of Appeals, Kenneth H. Guice v. Charles Schwab & CO., 89 N.Y.2d 31, 674 N.E.2d 282, 651 N.Y.S.2d 352, 15 October 1996. 218 New York Court of Appeals, Kenneth H. Guice v. Charles Schwab & CO., 89 N.Y.2d 31, 674 N.E.2d 282, 651 N.Y.S.2d 352, 15 October 1996. 219 It became effective on 29 August 2005, and implementation is scheduled for 2006. 220 US SEC, «Regulation NMS: Final rules and amendments to joint industry plans», 9 June 2005. 221 Trade through is the execution at a price that is inferior than a price displayed on another market. Accordingly, trading centers must execute all the orders at the best accessible prices or route these orders to trading centers where more favorable prices are displayed. 222 US SEC, «Regulation NMS: Final rules and amendments to joint industry plans», 9 June 2005. 69
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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Page 21 and 22: 3. INSTITUTIONAL COMPARISON 3.1 Sec
Page 23 and 24: The market share of the US banking
Page 25 and 26: FDIC-insured commercial banks are i
Page 27 and 28: The subsidiary stock institution is
Page 29 and 30: Regulatory reform over the past thi
Page 31 and 32: State credit unions were first exem
Page 33 and 34: There has however been much effort
Page 35 and 36: 3.2.2.2.2.2 Ownership and corporate
Page 37 and 38: Hermann Schulze-Delitzsch and Fried
Page 39 and 40: In contrast, building societies in
Page 41 and 42: The commitment of savings banks is
Page 43 and 44: 4. REGULATION AND SUPERVISION COMPA
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Page 47 and 48: The European Parliament has to be k
Page 49 and 50: In fact, it should be mentioned her
Page 51 and 52: As far as coordination at the feder
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Page 55 and 56: Another important factor in the cho
Page 57 and 58: In the European Union, contrary to
Page 59 and 60: Although younger than CESR, both CE
Page 61 and 62: 4.2.5.1.1.1.1 Limitation of the geo
Page 63 and 64: 4.2.5.1.1.3 Recent trend: regulatio
Page 65 and 66: Another important common feature be
Page 67: The best execution rule was first m
Page 71 and 72: The ISD set a basis for the develop
Page 73: Best execution rules exist in both
Page 76 and 77: The decline of savings institutions
Page 78 and 79: Relative to population, the Europea
Page 80 and 81: 5.2.2 Size of credit institutions 5
Page 82 and 83: 5.2.2.2 European Union In Europe, t
Page 84 and 85: 5.2.3 Concentration and consolidati
Page 86 and 87: 5.2.3.2 European Union Average CR5
Page 88 and 89: In terms of the nature of consolida
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Page 94 and 95: 5.3.2 Efficiency of credit institut
Page 96 and 97: Table 16: Evolution of the Return o
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Page 108 and 109: Table 19: Evolution of outstanding
Page 110 and 111: 6.2.1.2.2 Regulatory framework over
Page 112 and 113: 6.2.1.3 Comparison 6.2.1.3.1 Size o
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Page 116 and 117: The residential mortgage market in
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Funding by retail deposits represen
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In sharp contrast, the US mortgage
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6.2.3.1.2 Lenders to small business
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The securitisation process requires
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Factoring is also continuously gain
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6.2.3.2.4 Securitisation of small b
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The above fears can hardly be allay
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- ACH credits and debits: the stati
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6.3.2.1.2 Financial intermediaries
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It should be noted that two of the
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Assuming that technology, globalisa
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The report adds: “although it bou
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Graph 19: Use of different distribu
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In terms of funding of the business
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Since then, established banks have
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MoU Memorandum of Understanding OTC
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Annex 2: Statistical appendix Table
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Table F: Share of US banking indust
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Table L: Structure of the liabiliti
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Table R: Number of ATMS in the EU a
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F - Federal Deposit Insurance Corpo
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A comparative analysis of the US and EU retail banking markets - Wsbi

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