Direct Edge Wants a Retail Deal, Too
November 30, 2012
Christian says this program is less of a change for Direct Exchange than for other exchanges.
“We as an exchange have always had retail limit orders in our books. And it has been part of our mission to grow liquidity with retail limit orders,” Christian said.
He said the NYSE RPL is a separate form of liquidity that does not occur on its main market, where orders are displayed for all to see.
Christian added that Direct Edge’s program is “within our displayed market. And it is also a way that we continue to segment the volume in our book.”
Nevertheless, all of these exchanges, having to survive on weak volume, are seeking ways of finding increased retail business.
For example, William O’Brien, CEO of Direct Edge, recently said U.S. consolidated tape volume was down 17 percent for the year. In a meeting with Sandler O’Neill + Partners late last month, O’Brien also predicted 2013 volume will be “roughly flat” and that his firm is looking for new revenue sources.
Direct Edge, O’Brien told Sandler O’Neill, hopes strong retail performance will help.
“Direct Edge is the #1 or #2 routing destination among exchanges for the highly valuable order flow of retail brokers such as AMTD, Fidelity and Scottrade. Direct Edge is targeting 15-20 percent revenue capture increase in 2013,” O”Brien told Sandler O’Neill + Partners. But Direct Edge will likely need regulatory approval if it is to meet its goals.
So Direct Edge, in trying to swing the SEC, believes that it can make its case for price discrimination, or a “financial incentive,” for retail orders by citing the precedent of discriminating in favor of retail clients.
“The Commission has previously recognized,” Direct Edge wrote referring to the Euronext/NYSE order, “that the markets generally distinguish between individual retail investors, whose orders are considered desirable by liquidity providers because such retail investors are presumed on average to be less informed about short-term price movements, and professional traders, whose orders are presumed to be more informed.”
And that, Direct Edge and other exchange officials hope, will provide a signal change in how regulators look at exchanges.
“This sets the stage for what I believe will be a fundamental shift in the way equity exchanges operate,” wrote Joe Ratterman, president and chief executive officer of Bats Global Markets after reviewing the Euronext/NYSE order in an internal newsletter last summer.
“Core and foundational to the approved RLP rule is the new concept that an exchange can now offer a differentiated level of service to some firms and not to others,” Ratterman continued. “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.”