BATS Steps Up Competition for Retail Flow
Its Answer to NYSE Price Improvement Plan to Start Dec. 17
November 30, 2012
It’s time for exchanges to get a bigger slice of the retail order flow pie, a pie that wholesalers have been gobbling up, some exchange officials say.
Several exchanges, pushing various rules changes, now expect greater retail flow, possibly negating big wholesalers’ internalization advantages.
For example, BATS Global Markets officials have just received Securities and Exchange Commission approval for the last piece of its retail price improvement (RPI) scheme, subpenny pricing. As a result, the exchange said Thursday it will launch its program through the BATS BYX Exchange on December 17.
“By enhancing price competition for retail orders, our goal is to provide retail customers with better execution prices while improving the overall quality of the BYX Exchange for all market participants,” said Joe Ratterman, president and CEO of BATS Global Markets.
The one-year pilot starts roughly 100 days after the August 1 debut of the first such program designed to give small price improvements to retail investors on off-exchange trades that are coordinated by an exchange.
That was the Retail Liquidity Program from NYSE Euronext and launched on the New York Stock Exchange and NYSE MKT exchange.
Nasdaq is working ona similar program which it has dubbed the “Retail Investor Auction.”
The Retail Price Improvement plan at BATS “is a program to try to attract retail, marketable orders back to display and exchanges,” said chief operating officer Chris Isaacson.
“This sets the stage for what I believe will be a fundamental shift in the way equity exchanges operate,” Ratterman wrote in an internal newsletter last summer.
The breakthrough idea is that “an exchange can now offer a differentiated level of service to some firms and not to others. Specifically, and understandably so, it’s the retail investor that theoretically stands to benefit from this new latitude afforded to the exchange to differentiate among its members,” Ratterman wrote.
Here’s how BATS officials say they will be giving the individual investor a better deal.
BATS will allow retail orders asking for price improvement to be matched, off-exchange, against orders from customers of brokers and other parties designated as Retail Member Organizations who are willing to provide it, before the orders go onto its BYX Exchange for general trading.
The orders get matched at a multiple price levels, with the first to come in getting the best prices, BATS officials said.
Only Retail Member Organizations (RMOs) would be able to submit orders for price improvement. The retail investor would end up with a price at least a tenth of a cent better than what mutual funds, institutional investors, brokers or other market participants would get, according to BATS.