Agency broker and technology vendor ITG has raised objections to US regulator the Securities and Exchange Commission's (SEC) handling of NYSE Euronext’s retail liquidity program (RLP), arguing it risks exposing investors to unintended consequences.
Approved by the SEC earlier this month, NYSE’s programme aims to bring more OTC equity trading onto regulated markets. 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.
However, ITG questions whether the SEC should have accepted the program, given it raises market structure questions in the context of a single exchange filing, rather than a broader rulemaking, according to the firm. Market structure issues highlighted by ITG include the ability to offer sub-penny pricing, which is prohibited by Reg NMS, and the ability of the exchange to price discriminate, which is also not allowed under the Exchange Act.
The SEC has stated that more competition will be positive for retail markets. But ITG says the RLP effectively places the exchange in direct competition with its customers for retail order flow. The agency broker has also expressed concern other programs, such as a similar initiative by Nasdaq, could end up eroding the accepted market structure beyond recognition.
Other market participants have also expressed apprehension. Some 33 comment letters from private investors, broker-dealers, asset managers, industry associations and academics were addressed to the SEC concerning NYSE’s plans. Each cites the potential danger of the initiative to the existing US equities market structure.
“Several SEC-approved rules, as well as several pending regulations and industry practices, are directly impacted by the proposed program,” stated Leonard Amoruso, general counsel for the Knight Capital Group in his comment letter dated 7 March, 2012. “Accordingly, the potential for unintended consequences is substantial."
ITG concurred, but also added the caveat that there could be the potential for positive changes in dark trading, particularly if the RLP serves as a conduit towards greater industry discussion over best practices for non-displayed trading venues in general.
"Now that the exchange has won, expect less contention with the industry over dark pools and various policy ideas," stated an entry on ITG's weekly The Blotter discussion paper. "NYSE could use the RLP to pivot, assume a leadership position and help the industry sort out best practices for dark trading going forward."
NYSE’s RLP is scheduled to launch on 1 August 2012.