The Securities and Exchange Commission (SEC) has again extended the comment period for NYSE Euronext’s plans to establish a dark pool for retail investors after admitting that the plans “raise novel market structure issues” that warrant further consideration.
The US regulator has not set a new date for its verdict, but it is believed this will be within the next month after NYSE has submitted its own response to the SEC’s findings. The SEC was initially due to make a decision on the exchange’s plans by 24 December, but extended this until 7 February.
NYSE Euronext wants to create 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. According to NYSE, the plan would bring more OTC trading on exchange. OTC equity trading in the US is estimated to account for around 30% of overall trading flows.
Among the SEC’s concerns include a request to offer trading in sub-penny increments for stocks above US$1.
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 NYSE says adds to the amount of trading done away from public markets.
According to the SEC filing, the interaction of market making flow with the liquidity in NYSE’s proposed dark pool means “it is unclear whether the benefit of the sub-penny price improvement ultimately would reach the retail investor”.
The new offering, if approved, would compete directly with market making firms such as Citi, UBS, Knight Capital and Citadel, which typically pay retail brokers for receiving their order flow.