Exchange group NYSE Euronext has said its new US retail liquidity programme, which could be signed off by the Securities and Exchange Commission (SEC) this Friday, is intended to entice more trading back to public markets and improve price discovery.
The firm is planning to launch a non-displayed trading environment that would encourage retail brokers to have their own direct connections to the exchange. Retail brokers would receive a rebate for sending their orders to NYSE Euronext and trade against designated market making firms that will receive trading fee discounts for providing liquidity.
“The objective of the programme is to create incentives that increase the amount of trading on public markets,” Joe Mecane, co-head of US listings and cash execution at NYSE Euronext, told theTRADEnews.com, noting that around 30% of overall US trading is OTC. “It’s a way of bringing what already happens in the retail space onto an exchange environment and allowing us to use our ability of bringing multiple counterparties together to create a more efficient experience for retail traders.”
Currently, US retail brokers have direct relationships with market making firms such as Citi, UBS, Knight Capital and Citadel, which typically pay brokers for receiving their order flow. The market maker will then seek to internalise the order flow, enabling them to 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,” said Mecane. “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.”
However, in comment letters sent to the SEC on NYSE’s proposal, a number of the plan’s features have been questioned. One of these is NYSE’s plan to quote prices in sub-penny increments, which could lead to widespread changes to tick sizes across US bourses.
“If the Commission were inclined [to allow a reduction in tick sizes] it is very likely all markets (lit and dark) would immediately seek similar relief so as to keep the competitive landscape on a level playing field,” wrote Knight Capital’s general counsel Len Amoruso in the market maker’s SEC comment letter. “Market participants need to consider the impact that will have on a number of factors including trading technologies and capacity operational costs, execution quality, liquidity and gaming.”
Under current rules, trades conducted on exchange in stocks over US$1 must have a minimum tick size of US$0.01. However, this is not applicable to off-exchange trades, which Mecane argues adds to the amount of trading done away from public markets.
“Retail order flow executed off-exchange is traditionally done at sub-penny prices that are better than the displayed quote,” he says.
Meanwhile, rival bourse operator BATS Global Markets, which runs two US stock exchanges, raised concerns of a two-tier market that could result from NYSE’s plan to disseminate indications of interest (IOI) for resting retail orders on its proprietary data feeds only.
This, said BATS, raises similar issues to the debate surrounding ’flash orders’ in 2009.
But Mecane states that the issue has been “twisted”, noting that NYSE’s proprietary data feed is commonly used and cheap to access.
“We intend to provide the IOIs on the consolidated quote stream. Not doing so in the first place was just a time-to-market issue,” he adds.
NYSE Euronext plans to launch during Q1 2012 if regulatory approval is successful.
Mecane says he would not be surprised if other exchanges look to follow suit if approval is obtained but added that “there may not be room for many other competing programmes”, given the limited size of the opportunity.