SEC Approves Nasdaq’s Retail Price Improvement Pilot
February 19, 2013
The Securities and Exchange Commission has approved a Nasdaq Stock Market plan that would, in the regulator’s words, allow “institutional investors to interact with retail order flow that they are not able to reach currently.’’
The regulator gave its blessing to a Retail Price Improvement Program that would allow hidden orders from institutions to give retail orders sub-penny price improvements, before reaching public trading.
The Nasdaq plan is “highly similar,’ the SEC noted, to programs undertaken by the New York Stock Exchange and the BATS Exchange, since August of last year.
The program was approved for a 12-month pilot period. The program would be limited to trades occurring at prices equal to or greater than $1 a share. All Regulation National Market System securities would be eligible for inclusion.
In the Nasdaq plan, a new class of market participants called Retail Member
Organizations would be eligible to submit certain retail orders to the exchange. All of the exchanges’ members would be allowed to provide potential price improvement, through non-displayed orders. The price improvement would have to be at least $0.001 a share.
The SEC said the NASDAQ proposal is ”virtually identical” to the BATS Exchange’s Retail Price Improvement Program and “highly similar” to the NYSE’s Retail Liquidity Program, which started August 1.
In a different approach, Direct Edge’s competing program not offer sub-penny pricing on either of its EDGA or EDGX exchanges. Its tack, called Retail Order Designation, seeks to identify retail flow by asking retail liquidity providers to self-identify that the liquidity is retail. A market participant that sends in the retail order gets a rebate of 0.0032 per share, instead of providing price improvement.
The trading firm sending in the retail order can, however, provide some part of the rebate to the retail customer as an improvement in price.
To gain approval for its plan, Nasdaq amended its proposal on February 13 to clarify that any ‘riskless principal’ order had to conforom with Financial Industry Regulatory Authority Rule 5320.02, to qualify as a retail order.
Riskless principal is a characteristic of a trade in which a member who has received a customer order immediately executes an identical order in the marketplace, while taking on the role of principal, in order to fill the customer order.
Nasdaq started testing its program last Thursday.
User testing will also occur in the stock market’s production system on Saturday, March 9, 2013.
The New York Stock Exchange said its Retail Liquidity Program achieved average daily volume (ADV) of 9.5 million shares in trading conducted in January. That is five times the 1.9 million shares that traded daily in its first month last summer.
The programs are designed to help the exchanges compete with the matching of orders that takes place in brokers’ own pools of capital and other competing venues, where prices are not publicly displayed.
In January, 2.4 billion shares a day, or 36.7% of all trading in equities, occurred in broker pools, dark pools and other off-exchange systems, according to data compiled by BATS Global Markets.
