What it means
Traditionally a company listed its shares on one exchange, and trading happened there. As markets developed, regulators wanted to give investors more choice and encourage competition between trading venues.
Unlisted trading privileges are the legal route that lets another exchange trade the same security without a second listing. The exchange granting itself such privileges must follow rules set out in law and approved by the regulator, the US Securities and Exchange Commission.
The listing exchange keeps responsibility for setting and enforcing listing standards, while the other exchange only provides a venue for trading. Trades from all venues are reported to a common system, so the market for each security remains connected.
Plans such as the Nasdaq UTP Plan and the equivalent plans for securities listed on the New York Stock Exchange govern how quotes and trades are shared. They set out how data is collected, how fees are shared and how the best prices are distributed to all participants.
The details matter to firms that depend on market data. For companies, the effect is that their shares trade on many venues even though they chose only one for their listing.
The listing exchange continues to receive listing fees, but trading revenue is shared among venues. A company may benefit from tighter spreads, which are the gaps between buying and selling prices, thanks to competition.
For investors, the benefit is better prices and lower costs, because brokers can route orders to the venue offering the best price. The drawback is fragmentation, since liquidity is spread across several places and monitoring the market becomes more complex.
Brokers have duties of best execution to seek the most favourable terms for client orders. The framework also affects costs for firms that depend on market data.
Because trades occur in many venues, a firm needs a consolidated feed combining quotes and trades from all of them, and the fees for these feeds are a significant expense for brokers and asset managers. Disputes over who should receive what share of the revenue have been a regular feature of the regulatory debate.
In practice
Real-world examples.
Example
A technology company lists on Nasdaq, but its shares also trade on other exchanges through unlisted trading privileges. An investor's broker routes a buy order to whichever exchange shows the lowest offer at that moment.
Example
A regional exchange wants to attract trading volume. It obtains unlisted trading privileges for a group of large companies listed elsewhere, and offers lower fees to brokers. The aim is to win a small share of volume without the cost of attracting new listings.
Example
A finance director of a listed manufacturer notices her shares trade on several exchanges. She asks her investor relations team to monitor the combined volume rather than the figures from the listing exchange alone. This gives a truer picture of how actively the shares trade, and of where most of the volume takes place.
Case study
Seen in the real world.
Greystone Exchange is an illustrative, fictional regional exchange that wanted to compete with larger venues. It applied for unlisted trading privileges for 300 well-known companies and cut its fees for brokers who posted quotes.
Within a year, Greystone handled about 3% of the volume in those shares. Spreads in some stocks narrowed by a fraction of a cent, which saved investors money on large orders. Brokers reported that they could fill more of each order at the best displayed price. The listing exchanges, however, complained that Greystone's gain had come partly at their expense.
The listing exchanges argued that they bore the cost of regulating the companies while others shared the trading revenue. The illustrative lesson is that unlisted trading privileges widen competition, but they also raise questions about who pays for market oversight. Its finance team also noted that revenue from market data, rather than trading fees, was becoming an important part of the exchange's income.
Watch out
Common mistakes.
- Assuming a company chose to list on every exchange where its shares trade, when most venues trade it under these privileges.
- Thinking the listing exchange has no role, when it still sets the listing standards and keeps the primary relationship with the company.
- Believing that more venues always mean better prices, when fragmentation can make markets harder to monitor.
Questions
People also ask.
Does a company pay fees to exchanges where it is not listed?
Generally no, because listing fees are paid to the listing exchange, though other venues earn trading revenue.
Who regulates unlisted trading privileges?
In the US the Securities and Exchange Commission oversees them, and the exchanges must follow the rules approved by it.
How does this help investors?
It encourages competition between venues, which can narrow spreads and reduce trading costs.
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