NYSE Euronext has received long-awaited regulatory approval for its new Retail Liquidity Program (RLP), which it hopes will bring more OTC equity trading onto regulated markets.
Although the Securities and Exchange Commission (SEC) had previously said NYSE’s RLP plan raised “novel market structure issues”, it has now given its blessing to the scheme.
According to NYSE, the new initiative – which will launch 1 August – is complementary to existing offerings and is intended for firms that service retail order flow.
Under the RLP, retail brokers connect directly to the exchange and receive rebates for sending orders to the bourse and match flows against designated market making firms that benefit from trading fee discounts for providing liquidity. Retail brokers will have to submit orders that offer a price improvement that is a minimum increment over the protected best bid and offer.
Under current common practice, US retail brokers typically have direct relationships with market making firms such as Knight Capital and Citadel, which pay brokers for receiving their order flow. The market maker will then seek to internalise the order flow, letting them save on exchange trading fees, and will only trade on public markets as a last resort.
“The concern for us is that
exchanges currently get the dregs of flow that have already been viewed by many
other market participants, thereby increasing its toxicity,” Joseph Mecane,
executive vice president, NYSE Euronext, told theTRADEnews.com. “This is more about trying to help promote the display and participation
of a certain type of flow in public markets, rather than trying to fix the
retail market.”
Among other issues, the SEC raised concerns over a proposal in the RLP to offer trading in sub-penny increments for stocks above US$1. While stocks priced over US$1 have a minimum tick of US$0.01, the same is not true of off-exchange trades, which NYSE has said added to the proportion of trading done off-exchange.
NYSE’s RLP approval comes days after the US exchange group’s CEO Duncan Niederauer attacked the growth of dark pools in an article published in the Financial Times.
“More high-frequency and institutional traders are moving to these [dark] venues, where they can trade with less regulatory scrutiny,” he said. “Retail investors are put at a disadvantage as more and more information is outside the public view and excluded from the price discovery process. There is no need to sacrifice transparency in order to promote competition in financial markets.”