by Kyle Colona on July 9, 2012
As far out as it may seem, the SEC has approved the NYSE’s “Retail Liquidity Program” that will allow the Big Board to execute some trades off of the exchange.
In other words, the NYSE is getting into the Dark Pool game.
The timing does seem a little odd given that the CFTC has recently cracked down on a number of fraudulent dark pool hucksters and SEC head honcho Mary Schapiro has previously said that the agency is concerned about the lack of transparency in the dark pool world.
Anyway, the New York Times Dealbook reports that NYSE experiment is slated to begin later this summer and it will “direct trades from retail investors onto a special platform.” Once there, trading firms will then bid to offer them the best price and the deals will not initially be visible to the public.
Of course, if run properly, dark pools or “off exchange” trades allow investors access to better pricing, especially in the high frequency trading sector that has seen tremendous growth because of exchange traded funds looking for better deals. And there is a profit motive here as the exchanges, including NASDAQ and the CME, for example, have seen volumes decline as dark pools have grown in popularity.
That being said, this is a controversial maneuver that could be the gateway for a host of problems like fraud, market manipulation and other nefarious actions that have historically been found floating at the bottom of dark pools.
However, the NYSE experiment is seen as a way to confront the current industry practice that has seen many trades from retail investors directed to a few Wall Street players before the trades can reach one of the nation’s regulated exchanges. In other words, this is a bid by the Big Board to recapture market share.
But the exchange’s play is also counter intuitive as NYSE Euronext (the Big Board’s parent holding company) has been critical of the growing dark markets. In fact, CEO Duncan Niederauer recently wrote an op-ed in the Financial Times where he argued that the “evolution of our two-tiered system is undermining confidence in markets for equity issuers and investors.”
Further, other critics of the NYSE program contend that it could cause an uptick in trading away from the exchanges and “accelerate the fragmentation of the nation’s stock markets.”
And here’s a real shocker: the program will allow the exchange to execute stock trades in increments of less than a penny.
While this has been possible in off-exchange venues, it has been illegal for the exchanges to conduct penny trades. But fear not as the SEC intends to monitor the program during its pilot period for any unexpected effects.
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Kyle Colona is a New York-based freelance writer and a Feature Writer for CompliancEX and the Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications. You can find him on linkedin.