Retail Programs A Fundamental Shift for Exchanges
Q&A with BATS C.O.O. Chris Isaacson
Traders Magazine Online News, December 5, 2012
Regulators have made “a fundamental shift” in how they govern public exchanges, in allowing national exchanges to tailor their operations to serve a particular set of investors.
That’s what BATS Global Markets officials are saying in analyzing rule changes granted by the Securities and Exchange Commission, which are allowing the four major exchange operators to set up programs that give special price benefits to retail investors and allow those operators to introduce subpenny tick sizes for the first time, to accomplish this.
“This approval sets the stage for a fundamental shift in the way equity exchanges operate,” wrote BATS president and chief executive officer Joe Ratterman in a newsletter discussing the SEC approval of the Euronext/NYSE retail liquidity provider program (RLP).
He believes that the principle inherent in the SEC approval means exchanges can now “segment their member firms and offer differentiated services among different exchange member firms.”
The targeted programs allow public exchanges to better compete with off-exchange venues, the operators say. More than 30% of equity trading happens off-exchange in dark pools and brokers’ internal pools of orders, according to Tabb Group.
BATS’ BYX exchange, along with its rival exchanges, are pushing to obtain more prime retail flow. They would allow retail investors to specify that they want price improvement, if available, from institutional order flow. Nasdaq, in its plan, estimates the average price improvement would work out to 50 cents on a 500-share order. The plans are designed to combat the matching of retail and institutional orders directly, inside brokers’ internal pools of orders.
SYNOPSIS:How BATS' Retail Price Improvement Works
Over the last several years, Ratterman said in the same newsletter, “significant equity volumes” have been transacted away from public exchanges. Ratterman estimated that some 1,300 stocks traded “more than 50 percent of the time off-exchange in June’’ of this year.
The New York Stock Exchange was the first to introduce a plan, starting its Retail Liquidity Program on August 1.
BATS followed up with its own retail price improvement (RPI) program, which starts December 17. Direct Edge and Nasdaq Stock Market have announced similar plans.
In the BATS case, its one-year pilot covers about two dozen securities, but eventually all National Market System symbols will be included.
Both the NYSE plan and the BATS plan have been allowed to use sub-penny pricing, even though this would seem to violate Regulation NMS, which, in 2005, instituted a prohibition against sub-penny prices.
The rule changes approved by the SEC as the exchanges began to set up their pilot programs are intended to help lit venues compete with dark venues.
They will be able to discriminate in favor of the retail investor, through the use of sub-penny price improvement. BATS officials say their program will be unique in that orders will be matched at multiple price levels and can interact with the midpoint of the national best bid and offer. They have also been granted an exemption from some of the sub-penny trading rules.
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