The Economist - USA (2019-09-28)

66 Finance & economics The EconomistSeptember 28th 2019

2 crisis lows, and pay is growing at its fastest

pace in a decade. But on September 23rd

Mario Draghi, the head of the ecb, told

members of the European Parliament that

the longer the manufacturing slowdown

continued, the more likely that the rest of

the economy would follow. Analysts at

Capital Economics, a consultancy, recently

said that services such as technical support

and logistics that are exposed to manufac-

turing are already decelerating.

The ecb’s decision on September 12th to

launch a package of easing measures, in-

cluding cutting interest rates and restart-

ing asset purchases, might thus seem well-

timed. But since then the heads of several

national central banks, including France’s

and Germany’s, have said that restarting

bond-buying is unnecessary. Klaas Knot,

the head of the Dutch central bank, went as

far as releasing a statement describing the

ecb’s stimulus package as “disproportion-

ate”. Mr Draghi fretted to eu parliamentari-

ans that outspoken dissent risked under-

mining the bank’s pledges to keep interest

rates low and to continue with asset pur-

chases until it achieved its inflation target.

On September 25th Sabine Lautenschläger,

a member of the bank’s executive board, re-

signed unexpectedly, even though her term

expires only in 2022. She gave no reason for

her decision, but is known to have opposed

restarting asset purchases.

It is thus even more important for na-

tional governments to heed the ecb’s oft-

repeated pleas, and do more to counter the

slowdown with fiscal stimulus. That gov-

ernment-bond yields in many countries

are sub-zero bolsters the case. On Septem-

ber 17th the Netherlands took a tentative

step in that direction, announcing tax cuts

amounting to €3bn ($3.3bn, or 0.3% of

gdp), and promising to publish plans next

year for a public-investment fund. Ger-

many pledged spending measures to cut

carbon emissions (see Europe section),

though these are fiscally neutral. It will

take even more dreadful data releases for

Europe’s politicians to stop trying to bal-

ance the books at the expense of growth. 7

Reverse gear^2

Source: Eurostat

Germany, industrial production

January 2017=100

2017 18 19

80

85

90

95

100

105

110

To t a l

Motor vehicles T

echnology has robbed stock ex-

changes of their theatrics. Opening

days are an exception. Blue-chip firms list-

ing on Nasdaq, America’s second-biggest

exchange, get an hour of exclusive adver-

tising on its tower in Times Square. On the

New York Stock Exchange (nyse), the big-

gest, they earn the right to be deafened by a

bell above a 116-year-old trading floor.

Yet behind the pageant, competition for

listings is cut-throat. Last year Nasdaq

snatched 18 listings from nyse; six went the

other way. Now Investors Exchange (iex),

an independent upstart created in 2012, is

giving up the fight. On September 23rd it

said it would shut its listings unit to focus

on trading and new services. “We’ve spent

many, many, many hours flying around the

world trying to educate companies,” says

Brad Katsuyama, its boss. “The return on

our efforts was not where it needed to be.”

Under America’s equity-exchange duo-

poly, Mr Katsuyama argues, retail investors

pay too much for data and a fast connec-

tion, and are outpaced by high-speed trad-

ers’ algorithms (Cboe, the third-largest, fo-

cuses on exchange-traded funds). iex’s

fees, he says, are fair and simple by com-

parison. It also routes orders over a “speed

bump”, a coil of fibre-optic cable that slows

access to the market by 350 microseconds.

Listings were not originally part of its

plans. All exchanges can trade any stock,

wherever it is listed; indeed few do listings

at all. But “Flash Boys”, a bestseller on high-

frequency trading published in 2014, cast

Mr Katsuyama and iex as champions of or-

dinary investors against rigged markets.

The publicity piqued companies’ interest.

Listings can be lucrative: Nasdaq earned

$290m in listings fees last year. And win-

ning listings from the giants would have

been a pleasing endorsement.

Yet after 18 months iex had secured just

one: Interactive Brokers, an electronic bro-

kerage that switched from Nasdaq last Oc-

tober (this week it said it would go back).

Market participants say iex may have been

held back by its relatively low trading vol-

umes (see chart). Exchanges determine the

opening and closing prices of stocks they

list; more bids should mean more accurate,

less volatile quotes. Price discovery seems

to have mattered more to prospective list-

ers than iex’s modest fees and champion-

ing of the little guy.

Despite the failed listings experiment,

iex is still making inroads. Though small

compared with Nasdaq and nyse, it trades

6,000-7,000 stocks and exchange-traded

funds each day, making it the world’s sev-

enth-largest exchange operator by trading

value. It has plans for new business lines,

such as iex Cloud, which offers data to soft-

ware developers, and iex Astral, a data plat-

form built with fund managers. It is rolling

out iex Signal, machine-learning software

that predicts short-term price movements

to help companies time stock buy-backs.

And iex has helped focus attention on

its pet issues. Supported by large asset

managers, the Securities and Exchange

Commission, America’s main financial

regulator, is waging court battles against

nyse and Nasdaq over data and transaction

fees. Other newcomers, such as the Long-

Term Stock Exchange and Members Ex-

change, are also gearing up to trade equi-

ties. Meanwhile, iex’s main innovation is

being copied. By 2020 a dozen markets,

from Toronto to Moscow, plan to use some

sort of speed bump. Enough, perhaps, to

ring alarm bells in Times Square. 7

An iconoclastic stock exchange loses a

battle—but not yet the war

American stock exchanges

Flash boys in the

pan

Fighting another day

Source:Cboe

US equities trading market share

Five-day average to September 25th 2019, %

0 10203040

Off exchange

NYSE

Nasdaq

Cboe

IEX