Nasdaq OMX will join the other main US exchanges in offering a new segment on its market designed specifically for retail flow after receiving regulatory approval for its Retail Price Improvement (RPI) plan.
The Securities and Exchange Commission (SEC) will let Nasdaq OMX run a 12-month pilot scheme that allows designated retail member organisations to submit flow in all Reg NMS stocks from individual investors to the exchange. RMOs are defined as firms that conduct retail business or handle retail order flow on behalf of another broker and RPI trading interest will be advertised to all of the exchange’s members.
All exchange members will be able to execute against retail order flow as long as their trades beat the protected best bid and offer by at least US$0.001 per share.
Nasdaq OMX’s proposal bears similarities to retail initiatives recently established by NYSE Euronext and BATS Exchange. In creating retail price improvement segments, all three requested exemption from an SEC rule requiring trades to be executed at penny increments.
However, unlike NYSE Euronext’s scheme, Nasdaq OMX will allow retail orders to execute at multiple price points and will not create a new class of retail liquidity providers – essentially market makers that are required to beat the protected best bid and offer for a portion of the trading day.
The majority of US retail flow is currently conducted off-exchange – where sub-penny pricing is allowed – by market making firms like Knight Capital or Citadel, which aggregate flow from retail investors and offer price improvement by internalising as many orders as possible.