• SEC Approves NYSE Retail Liquidity Programs
  • July 13, 2012 | Author: Luke B. Falgoust
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On Tuesday, July 3, 2012, the Securities and Exchange Commission ("SEC") approved controversial proposals by exchanges operated by NYSE Euronext that will enable those exchanges to compete with wholesalers for retail order flow. The exchanges plan to launch the "Retail Liquidity Programs" on August 1, 2012, which will be run as one-year pilots. The programs will allow some orders to go undisplayed on the New York Stock Exchange ("NYSE") as a way for the biggest stock trading venue to attract individual investors.

    The programs strive to provide better pricing on retail orders than is available at the national best bid or offer. Through providing price improvement for retail orders within an exchange environment, the programs aim to afford individual investors new economic incentives and to ensure greater transparency, liquidity, and competition throughout the U.S. cash equities marketplace.

    The NYSE and NYSE MKT first proposed their programs in October 2011. Such proposals drew opposition from both the buy side and sell side mainly because they would violate Rule 612 of Regulation National Market System ("NMS"), commonly referred to as the sub-penny quoting rule. Under the programs, market makers will be allowed to post hidden quotes in sub-penny increments that may only be traded against by qualified retail brokers. Those in opposition were quick to mention this is a violation of the SEC’s ban on quotes below $0.01, which the regulator has noted could discourage traders from posting limit orders.

    The NYSE Euronext exchanges requested exemptions from the sub-penny rule and the SEC granted such request. In doing so, the SEC noted that limit order traders were unlikely to be harmed by the hidden sub-penny quotes because they were specifically earmarked for retail orders. The SEC argued that limit order traders were unlikely to interact with retail flow anyway as very little reaches the public markets.

    In letters to the SEC, brokers and their representatives criticized the NYSE proposal and recommended the regulator not rush into a decision. In public, they have said they are ready for any competition from the exchanges, as their services are superior.