According to the NYSE, its combination with Archipelago is expected to save $100 million annually in explicit costs. Similarly, Robert Greifeld, president and chief executive officer of Nasdaq, said the deal would result in cost "synergies" of $100 million a year for at least the first three years of the new entity. Those savings and synergies could flow to investors through lower costs of doing business on the exchanges.
Eugene A. Noser Jr., president of Abel/Noser Corp., New York, an agency-only broker and transaction cost analysis specialist, said he expects both components of trading costs to decline in the new markets.
"It definitely should quicken the speed of trading and lower the cost," he said, referring to the market consolidation. "It should lower costs very considerably."
Explained Ian Domowitz, a managing director at ITG Inc., New York, an equity trading and transaction analysis firm: "Historically, the costs of providing both operational and building services decrease sharply with electronic trading technology. You can then think about whether or not that's going to impact commissions, and the cost to trade could indeed go down on a commission level as exchanges become more competitive. The reason is simply that as they become more competitive, the sell-side that trades with them faces lower costs and, in principal, that will be passed onto the consumer."
On the implicit cost side, the cutting-edge trading methods and strategies that are increasingly being used by buy-side investors — to limit market impact and maintain their anonymity — work best in an electronic market environment, which also suggests the new market structure will lower costs for investors.
"Trading is a game of information leakage — the more information leaks, the more expensive the trading becomes," Mr. Domowitz said. "To the extent you can achieve anonymity, whether through block trading systems … or an electronic or automated exchange, you're going to save money."
From a purely economic standpoint, less competition typically means greater pricing leverage by the remaining participants, but Theodore R. Aronson, a partner at institutional money manager Aronson + Johnson + Ortiz LP, Philadelphia, said that's not the case here.
"An economist could make a pretty reasonable case that competition is a good thing and a monopoly is a bad thing," he said. "But if you fragment the markets enough they can — and in my opinion they did — approach better things for smaller investors and bad things for big investors. And over the last 30 years, small investors have subcontracted their money management to big investors."
He called the market acquisitions "unbridled good news" for investors and added: "I have no vested interest other than lower transaction costs."
At the $64.5 billion Ohio Public Employees Retirement System, Columbus, Joan Stack manages equity trading. During the past two years, she has moved "99.9%" of trading for the fund's passive index investments to electronic direct market access, which has lowered the system's broker commissions on passive index trades by 62% and overall implementation shortfall — a common transaction cost measure — by 58% year over year. While she said she would welcome greater electronic access to the NYSE for trading active funds, the wave of consolidation might only offer short-term cost savings.
"Less competition sometimes means higher prices in the long run," she said. "For all the benefits we're going to get near term with better technology, connectivity and speedier executions, maybe longer term costs will rise."