The Securities and Exchange Commission has approved the New York Stock Exchange LLC and NYSE Amex LLC proposal for a pilot program that lets them set up for one year a private trade execution venue for retail investors. The “retail liquidity program” will go up against internalizing brokerage firms for retail order flow while offering price improvements at mere fractions of a penny. (Currently retail brokers send most of their orders through broker dealers that internalize or execute them in over-the-counter markets instead of bilateral exchanges.)
According to NYSE Euronext (NYX), the program will be implemented on the NYSE MKT and NYSE on August 1 and is complimentary to the trade execution options that currently exist for retail investors. The program is for direct use by retail brokerages and market intermediaries that work with retail order flow providers.
In a release issued last week, NYSE Euronext executive vice president Joseph Mecane said that giving improved prices for retail orders in an exchange environment lets individual investors afford new economic incentives while creating greater liquidity, transparency, and competition through the US cash equities marketplace. The program will set up two new market participant classes at NYSE exchange: 1) retail member organizations that will turn in retail orders to the exchanges and 2) retail liquidity providers that will have to give price improvements as interest that is more competitively priced than the exchange’s best protected bid/offer as a tradeoff for specific economic benefits. A NYSE member can qualify as a liquidity provider by obtaining approval as a market maker or supplementary liquidity provider on the exchange, while demonstrating that it can meet retail liquidity provider requirements.
According to the SEC, a lot of commenters were opposed to the NYSE pilot program. One common concern is that segmenting retail orders might get in the way of making sure that non-retail investors get fair access, and, as a result, end up establishing a two-tiered market. There is also worry that the program might cause sub-penny trading to grow.
Yet, despite the opposition, the SEC believes that the proposed rule changes could improve retail investors’ price orders while creating a chance for institutional investors to engage with retail order flow to which they currently don’t have access. The Commission disagrees that the program might create a significant “shift” in the structure of the market. It is convinced that the program will closely replicate existing OTC market trading dynamics and that this will create another competitive venue for the execution of retail order flow.
As part of its July 3 order approving the pilot proposal, the SEC gave NYSE a limited exemption from Rule 612 of Regulation NMS [National Market System] The sub-penny rule doesn’t allow exchanges to display or accept orders or quotations in any NMS stocks in price increments under a penny-unless the orders or quotations in stock are priced at under $1/share.
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SEC Approves NYSE Proposal to Set up Pilot Program for Retail Order Execution, Bloomberg/BNA, July 6, 2012
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