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December 1, 2011

NYSE Floats Sub-Penny Again

By Peter Chapman

Also in this article

  • NYSE Floats Sub-Penny Again
  • Page 2

Proposals by two of the exchanges operated by NYSE Euronext mark the second time in the past two years the exchange operator has looked to sub-penny pricing to gain an advantage over brokers in the trading of retail orders.

Joe Mecane

The New York Stock Exchange and NYSE Amex have asked the Securities and Exchange Commission for approval to allow a special group of "Retail Liquidity Providers" to quote between a stock's best bid and offer in increments of one-tenths of a cent. The quotes would be hidden from view and only accessible by providers of retail order flow.

The intent is to provide the retail customer with better pricing than is visible on exchange books, a service now provided by wholesalers and other brokers that internalize their orders.

Under the plan, the exchanges would pay order senders and charge the liquidity providers. Only bona fide retail order senders would qualify for the service. The RLPs will come from the ranks of the exchanges' Designated Market Makers and Supplemental Liquidity Providers.

Still, under the SEC's Regulation NMS, exchanges are barred from quoting in sub-pennies. NYSE and NYSE Amex are seeking exemptions to the rule, which does not apply to broker-dealers.

Much retail flow is internalized by broker-dealers. The proposal by NYSE marks its second attempt to win approval from the SEC to quote in sub-pennies as a way to compete with internalizers. Last year, NYSE and two other exchanges wrote a joint letter to the SEC requesting the ability to trade in sub-pennies in certain low-priced stocks. The SEC did not approve the request.

There has been some debate over the use of sub-pennies in recent years as spreads in many stocks have narrowed to a penny. Some trading officials contend that a penny increment may be too high for some securities.

"What is the natural tick increment at which stocks should trade?" Joe Mecane, an NYSE Euronext executive vice president, asked rhetorically at October's Security Traders Association's annual conference. "This has been subject to debate since the SEC released its Concept Release."

The NYSE proposal calls for using hidden, not displayed, quotes. That contrasts with the proposal in the letter sent by NYSE, Nasdaq OMX, and BATS Global Markets last year to the SEC that called for using displayed quotes.

"Why not do this in displayed fashion and put them on the SIP feeds?" Chris Isaacson, BATS' chief operating officer, asked at the conference.

Besides the issue of transparency, the proposal is likely to impact the ongoing debate over a trade-at rule. The SEC is mulling a rule that would push wholesalers and other internalizers to offer more price improvement to their customers. The brokers have complained such a rule would kill their business.