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January 2, 2012

NYSE's Sub-Penny Quandary

By Peter Chapman

Also in this article

An NYSE Euronext proposal to permit its members to quote in sub-pennies is proving highly controversial. 

Joe Wald, Knight

The exchange operator's "Retail Liquidity Program" would create dark pools at the New York Stock Exchange and NYSE Amex, where members could vie for retail order flow with quotes only a tenth of a cent better than the market's best displayed prices.

If approved, the scheme could upend one of the four planks of Regulation NMS-the prohibition against sub-penny pricing-and possibly change trading behavior dramatically. 

NYSE submitted the proposal to the Securities and Exchange Commission in October. The regulator put it out for public comment in November. The comment period ended in December, but many of the respondents requested the industry be given more time to digest the plan.

"This is a pretty flashy proposal," Joe Wald, an executive with Knight Capital Group, said at a recent industry conference. "There are several elements that need considerable time to comment on."

Joe Mecane, NYSE Euronext

Knight is no bystander here. If the NYSE wins SEC approval for its proposal, the big trading house could find itself in competition with the exchange as well as a highly sought-after customer. Knight's general counsel Len Amoruso has already had one meeting with the SEC's Division of Trading and Markets over the proposal; the sit-down included division head Robert Cook and eight staffers.

Others in the industry are also asking for more time to absorb the plan. The Securities Industry and Financial Markets Association, an industry group representing the largest brokerages, told the SEC the NYSE proposal raised "significant market structure implications that require additional time to be considered."

Hudson River Trading, a large market-making firm and NYSE member that would be eligible to quote in the new pools, contends the proposal "raises significant issues regarding competition among exchanges, ATSs and over-the-counter internalizers." The issues are too broad to be addressed in a proposal by a single exchange operator, HRT managing director Suhas Daftuar told the SEC in a letter, and ought to be addressed with "comprehensive rule-making."