Direct Edge Wants a Retail Deal, Too
November 30, 2012
Let us make a retail deal, too.
That, in essence, is what Direct Edge wants from regulators for its exchange.
It asks, in a new rule filing with the Securities and Exchange Commission, for the ability to discriminate on retail orders, but on a public exchange.
Direct Edge hopes to attract more retail order flow, by getting market participants to designate which orders are Retail Orders and give senders of those orders a rebate.
This will help bring in orders, exchange officials say, that otherwise might get diverted to brokers’ internal pools of potentially matching orders and other off-exchange venues. These venues, they contend, don’t give the average investor as good a deal as Direct Edge will.
“The Exchange believes that consumer protection and transparency is promoted by rewarding displayed liquidity on exchanges over off-exchange executions,” according to the Direct Edge filing.
The New York Stock Exchange initiated a Retail Liquidity Program on August 1 that incorporates non-displayed orders, matching retail orders seeking price improvement with institutional orders in a cross between a lit and dark pool of orders. BATS Global Markets followed this week with a similar Retail Price Improvement plan that debuts December 17.
In its approach, Direct Edge asks the Securities and Exchange Commission to let it create new classifications for exchange members to use to designate what are Retail Orders. The ZA tag is for retail orders that add liquidity and the ZR tag is for orders thar remove it.
These orders would have a “financial incentive,” according to the filing.
ZA orders that add liquidity would receive a rebate of $0.0032 per share. ZR orders that remove liquidity would get a rebate of $0.0030 per share.
This retail liquidity comes from broker-dealers, but they are retail broker-dealers, says Bryan Christian, head of sales for Direct Edge. The brokerages are expected to pass on the discounts.
Why offer a discount for adding and removing liquidity from the exchange?
Direct Edge officials, in their filing, says many retail orders are executed over the counter where average investors don’t have the professional savvy to get the best deals. So it is “appropriate” to bring flow back to the exchange.
They also justify their attempt to obtain more retail business by arguing that more displayed order is “a public good,” according to the filing. Direct Edge officials maintain this provides more price transparency and public price discovery. Those, they say, it will ultimately lead to substantial reductions in transaction costs.”
BATS, like Direct Edge, said its program is designed “to attract retail marketable orders back to display (markets) and exchanges,’’ says Chris Isaacson, COO for Bats.
But Direct Edge wants to put some distance between itself other exchanges’ plans by the way it is going to offer a discount to retail business.
A difference with the competing exchanges all seeking more of the retail investor’s business, Christian adds, is Direct Edge’s “tagging”, or identification, of retail orders.
“Basically, we’re saying that, if you’re a retail broker-dealer, and your send me a retail order, down you’re going to tag it. You’re going to tell me it’s a retail order,” according to Christian