The US Securities and Exchange Commission (SEC) has pushed back approval of global exchange group NYSE Euronext’s proposed one-year pilot retail liquidity programme, which is aimed at attracting more retail flow to its New York Stock Exchange and NYSE Amex trading platforms.
The US securities watchdog had been expected to make a decision by 24 December, but the nature of the changes planned by NYSE Euronext – which include sub-penny price increments – and the extensive feedback from the industry have caused the SEC to announce an extension to 7 February.
“The commission finds that it is appropriate to designate a longer period to take action on the proposed rule changes so that it has sufficient time to consider the exchanges’ proposals, which would allow the exchanges to utilise non-displayed orders that offered price improvement to retail order flow potentially in sub-penny increments, and the comment letters that have been submitted in connection with them,” read a SEC statement.
As part of its plans to create a non-displayed trading environment to encourage retail brokers to direct orders to its US trading platforms, NYSE Euronext has submitted a request to allow firms it has identified as retail liquidity providers to quote between a stock's best bid and offer, with a tick size of US$0.002. The quotes for these smaller increments would be non-displayed and only accessible by providers of retail flow.
NYSE has attempted to implement a similar proposal before – in 2010, NYSE and fellow US exchange operators BATS and Nasdaq OMX submitted a joint letter in which they requested permission to trade in sub-penny increments. However, the original plan, which called for the sub-penny quotes to be displayed, failed to gain SEC approval.
Offering sub-penny price increments would allow the exchange to effectively compete with brokers that already offer a similar service through their own internalisation processes. While traders are currently not allowed to quote in sub-penny prices under the SEC's Regulation NMS, they can trade at sub-penny increments if it leads to price improvement – an ability that has been exploited by market makers to snap up retail flow from retail brokers.
Brokers including Knight Capital, a major aggregator of US retail order flow, have voiced objection to the plan, on the basis that it would damage their business model and undermine one of the core pillars of Regulation NMS. However the exchange insists that it simply intends to create a more level playing field.
“While the exchange believes that markets and price discovery optimally function through the interactions of diverse flow types, it also believes that growth in internalisation has required differentiation of retail order flow from other order flow types,” stated the NYSE submission. “The differentiation proposed herein by the exchange is not designed to permit unfair discrimination, but instead to promote a competitive process around retail executions such that retail investors would receive better prices than they currently do through bilateral internalisation arrangements.”