BATS Global Markets has followed US exchange rival NYSE Euronext by proposing a retail price improvement (RPI) initiative for its BYX Exchange.
BATS’ plan, a one-year pilot that is subject to approval by the Securities and Exchange Commission, is designed to allow retail orders to match against each other and provide price improvement relative to the national best bid or offer.
The programme will result in the creation of a new class of participant on BATS known as retail member organisations (RMOs). All members of BYX – one of two US equity markets offered by BATS – can obtain certification to submit ‘retail price improvement’ orders that offer price improvement in US$0.001 increments for order submitted by RMOs.
Firms that want to become RMOs must have a retail trading business or handle retail orders on behalf of another broker-dealer. All NMS securities priced at US$1 and above will be included in the new scheme.
To distinguish its offering from NYSE Euronext’s, which went live on 1 August, BATS will allow retail orders to trade against price improving liquidity that doesn't originate from a RPI order, allow retail orders to execute at more than one price point and charge all members the same fee for entering RPI orders. Under NYSE’s offering, designated market making firms will benefit from trading fee discounts for providing liquidity.
“At the core of our RPI program is a unique competitive dynamic, one that we believe will encourage active and broad participation among our many diverse exchange members,” said Joe Ratterman, chief executive of BATS Global Markets. “Our goal with the RPI program is to provide consistent and meaningful price improvement for retail investors, which in turn can enhance the overall trading experience for all of our participants.”
Speaking after the approval of NYSE’s retail liquidity programme at the end of July, Ratterman admitted that the plan would have a “major impact” on the industry and lead to competitive responses for years to come.
“This approval sets the stage for what I believe will be a fundamental shift in the way equity exchanges operate, the doctrine by which exchanges interact with their customers, and how exchanges and off-exchange venues compete with each other,” Ratterman said at the time.
As part of its proposal, NYSE submitted plans to offer trading in sub-penny increments for stocks above US$1, a source of much contention among market participants.
Stocks priced over US$1 traded on exchange have a minimum tick size of US$0.01, but – prior to NYSE’s proposal – the same was not true for off-exchange trades. This allowed market makers like Citadel or Knight Capital to offer better prices for retail orders compared to exchanges