Articulación del PACRI en el ciclo del proyecto

Likely one of the most difficult component of costs to estimate accurately is the effect of a trade-through rule on the level of competition. One possible approach might be the following. The first step would be to obtain a reasonable estimate of the margin an ATS earns on each share it executes. Next, assume all shares associated with trade-throughs not caused by an agency problem would have gone to the ATS and thus represent lost demand as a result of a trade-through rule. If the value of this lost demand is a substantial share of an ATS’ expected profits then it might assumed the ATS would not enter (revenues might be used if margin data is not available). The next step would be to use an estimated relationship between the amount of competition and quote spreads and combine this with the estimated change in the level of competition. The resulting estimated impact on spreads can then be converted to an overall dollar impact following the method outlined above. It would be appropriate to

document any other estimated changes in market quality due to reduced competition even if these cannot be translated into dollar amounts. The competition measure should account for whether there is competition from foreign exchanges for the securities considered. There is already US competition in interlisted securities so the change in the concentration measure for these securities could be small resulting in a small effect on measures of market quality. Also, for stocks that are not interlisted but that have the characteristics of an interlisted stock, the issuer can use the (implicit) threat of interlisting to obtain better market quality and, thus, the incremental effect on competition for these securities may also be small.

The cost of a trade-through rule in terms of limiting an entrant’s ability to take advantage of greater speed (because under a trade-through rule the slowest marketplace may determine the pace) would be difficult to measure. A very rough estimate might be obtained by

estimating the approximate costs to build a faster system, such as the cost of designing faster software, buying faster hardware and obtaining more bandwidth with greater reliability. Presumably regulators will know how to estimate the cost of enforcement that they will incur. Factors that may need to be considered include the number of investigations (or audits) per year and the amount of effort and cost to resolve disputes or to bring an enforcement action. Estimating trade-through rates to compute the benefits will give the regulators some

experience with the cost and difficulty of identifying trade-throughs with sufficient rigor to be able to use them credibly when taking an enforcement action. Some consideration should also be given for imperfect enforcement. If trade-through rates are not expected to be

brought down to near zero then the other benefit and cost calculations should take this into account. Also, any expenses to clarify standards and responsibilities should be included. Such expenses would likely differ, as would some of the other expenses, depending on whether the rule was applied to marketplaces or market participants.

The costs of enforcement on marketplaces or market participants will also need to be estimated. The cost of enforcement for other regulations may be helpful guide. However, to the extent that the incremental cost of an additional regulation is not equal to the average costs of existing regulations this should be taken into account.

Finally there is the cost to market participants or marketplaces. These include upfront one- time costs and ongoing costs. Fixed costs include establishing policies and procedures and any costs to modifying computer systems. Ongoing costs would include monitoring costs. If compliance with the trade-through rule makes computer algorithms more complex such that they are harder to maintain or more difficult to modify (perhaps when trying to improve an algorithm) these costs should be taken into account, though they may be difficult to measure. The costs of linkages must also be taken into account. If the trade-through rule is imposed on market participants and the rule does not require market participants to link to all

marketplaces then establishing the links would be voluntary and thus should not be included as a cost. The only cost would be if the linkage had to be modified in some costly way to accommodate the trade-through rule. However, if the rule is imposed at the marketplace level then the costs of the linkage should be taken into account unless the link would have been created in any event. If linkages between marketplaces must be prescribed then some consideration should also be given to the fact that regulations will generally be less efficient then if linkages were formed voluntarily. (We understand that the TSX is not averse to creating such linkages with ATSs).

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