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BATS takes aim at retail market share with new plan
NEW YORK |
NEW YORK (Reuters) - BATS Global Markets, the No. 3 U.S. stock exchange, said on Tuesday it plans to offer discounts of a tenth of a cent on retail orders, similar to a controversial pilot program at the New York Stock Exchange regulators approved last month.
The BATS retail price improvement program (RPI) sets retail investors apart from funds, brokers and other professionals, who will still pay publicly displayed prices for securities.
The U.S. Securities and Exchange Commission in early July granted Big Board operator NYSE Euronext a limited exemption from a rule that bans the sub-penny pricing of stocks on national securities exchanges.
The ban did not apply to non-exchange trading venues, and sub-penny discounts have been widely used by wholesale brokers such as Knight Capital and Citadel, which already account for the majority of retail order flow.
Exchanges see the sub-penny programs as a way to win back market share from off-exchange venues.
Over the long term, retail discount programs have "the potential to disrupt the market to create a much more robust offering for the exchanges to be able to compete with the wholesalers," said Chris Nagy, an exchanges and brokerages consultant.
BATS, which began as an off-exchange trading venue, its name originally an acronym for Better Alternative Trading System, runs the BYX and the BYZ exchanges. Together, the two exchanges captured 12.3 percent market share in U.S. equities in July.
The company's proposed one-year pilot program, which is subject to approval by the SEC, will offer BATS members who trade on the BYX exchange a tenth-of-a-cent price improvement on retail orders.
Wholesalers routinely offer retail price improvement. Their ability to profit on what amounts to regulatory arbitrage has prompted NYSE Chief Executive Duncan Niederauer to speak out on several occasions against what he says is an uneven playing field in U.S. equity markets.
In many cases the discount wholesalers offer on retail orders is just one-hundredth-of-a-cent or less.
If the exchanges are able to execute retail orders at a better price, the wholesalers, which have best execution responsibilities, will have to send more retail orders to the exchanges. The alternative would be for wholesalers to offer better discounts, but that could impact their profitability.
NYSE's retail liquidity program began on August 1, and was showing early success, a spokeswoman for the exchange said, without giving more detail.
DOWN THE RABBIT HOLE
Critics of such plans, including the Securities Industry and Financial Markets Association, and the Security Traders Association, have said the sub-penny pricing models create two-tiered price markets and raise fair access issues, when some orders have execution priority over other investors.
BATS said its program uses a strict price-time priority model and executes retail orders at multiple price levels.
"At the core of our RPI program is a unique competitive dynamic, one that we believe will encourage active and broad participation among our many diverse exchange members," Joe Ratterman, chief executive of BATS, said in a statement.
There is also a concern that allowing exchanges to discriminate between their consumer bases will further complicate the structure of U.S. markets, making rules more difficult to monitor and enforce.
"It further takes us down the rabbit hole of market structure confusion," Nagy said.
Other exchanges, such as Nasdaq OMX and Direct Edge, are expected to follow suit with their own versions of sub-penny pricing plans.
Nasdaq CEO Robert Greifeld said in a conference call last month that his exchange is working with the SEC on a draft proposal for a retail liquidity program that Nasdaq hopes to launch in the latter half of the year.
Greifeld said the plans do indeed "put more wrinkles into the market structure.
"But today, we see differentiated market structures becoming more commonplace and we will participate in that," Greifeld said.
(Additional reporting by Herb Lash; Editing by Steve Orlofsky, Dan Grebler and Leslie Gevirtz)
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