BATS Global Markets has received approval from the Securities and Exchange Commission (SEC) to launch a retail trading segment on its market from next month.
BATS will pilot its Retail Price Improvement (RPI) programme on its BYX exchange from 17 December for one year, giving brokers of retail investors an alternative to achieve price improvement on orders.
The RPI scheme creates a new type of market participant known as retail member organisations (RMOs) that can only be registered with BATS if they handle retail orders, either directly for clients or on behalf of other firms. Retail orders sent by RMOs will be able to execute against retail price improving orders and other liquidity that offers an improvement on the national best bid and offer.
BATS members that wish to interact with RMO orders will have to first certify themselves with the exchange and can offer price improvement in US$0.001 increments. Orders are executed using a price-time priority model.
The RPI pilot will initially cover a select range of securities before gradually expanding to all stocks offered on BYX over the course of next year.
“Our RPI program is designed to provide better executions for individual investors by offering material price improvement for retail orders,” said Joe Ratterman, president and chief executive of BATS Global Markets. “By enhancing price competition for retail orders, our goal is to provide retail customers with better execution prices while improving the overall quality of the BYX Exchange for all market participants.”
BATS’s scheme follows a similar initiative from NYSE Euronext that launched on 1 August. Unlike NYSE, BATS will allow RMO orders to trade against non-retail price improving liquidity and allow retail orders to execute at more than one price point.
The push by exchanges to offer retail services caused a stir in the industry because it required a rule change by the SEC that allowed bourses to offer sub-penny pricing. At present, the majority of retail trading is internalised off-exchange by firms such as Citadel, Knight and Citi – which have historically offered sub-penny price improvement – with the exchange used as a last resort.
The model was recently criticised by the CFA Institute, a body representing investment professionals, for its potentially harmful impact on price formation.
“There is a danger of market quality deteriorating if internalisation goes too far,” said Rhodri Preece, director of capital markets policy at the CFA Institute and author of ‘Dark pools, internalization and equity market quality’. “For US retail flow, brokers only need to beat the NBBO by a fraction of a penny – we don't think this is ‘meaningful’ enough to deprive those market participants posting limit orders on lit markets from retail order flow.”