The New York Stock Exchange now has its very own dark pool, after the SEC on Thursday approved an NYSE pilot initiative to offer retail investors a separate exchange that will offer them more favorable prices.
Under the 12-month initiative, called the Retail Liquidity Program, the New York Stock Exchange becomes the first exchange to essentially offer a dark pool where individual investors can obtain cheaper prices than those available to institutional investors, and where shares can be traded before they reach the NYSE floor.
NYSE Euronext has already created a dark pool in Europe, Smartpool, which it set up in partnership want with HSBC, J.P. Morgan, and BNP Paribas, for institutional investors to trade in bulk and anonymously.
This latest move by the NYSE comes at a time when overall market volume has been declining. It shows that the exchange is stepping up to the plate and determined to keep a competitive edge since firms like Knight Capital, Citadel and UBS have already captured market share from exchanges by running their own dark pools. In some cases they execute trades at prices that beat the going market rate by fractions of a cent - something that exchanges have to date been banned from doing. Some of these firms have criticized the NYSE proposal, claiming that it goes against the axiom that an exchange should provide a level playing field for all participants.
However, NYSE argues that the changes are needed to allow exchanges to compete fairly with banks and dark pools, and that individual investors will benefit from better prices.
"The bottom line is that exchanges are trying to fight back against what they consider dark pools. A third of the trading is done off the market. Everybody’s hurting. They’re all trying to push with programs that will attract liquidity," says Vikas Shah, managing director, Rosenblatt Securities.
"Retail liquidity is going to wholesalers, like Citadel, Knight, UBS and Citi. They pay a large brokerage firm like TD Ameritrade or Charles Schwab to get the retail orders," he adds, explaining that these firms then match those orders against the order flow they have internally.
"A lot of retail flow doesn’t make it to NYSE. So this program is trying to attract flow that otherwise wouldn’t make it to their floor. So their investors can see their flow again," Shah says.
The Wall Street Journal notes that other exchanges are now bound to follow NYSE’s lead. Nasdaq already has its own plans in the works.
CME has a similar program, which caused a group of angered independent traders to stage a mini walk-out in April after the exchange accepted large block trades instead of using the human traders on the bourse's open outcry auction market.
As more exchanges step up their search for liquidity, It is likely that some brokers at least will continue to challenge the latest 'dark pool' approach, fearing they will lose a thriving retail business.