Regulators have approved a controversial proposal from the New York Stock Exchange that will result in some stock trades being diverted away from the traditional exchange.
The programme, expected to begin later this summer, will direct trades from retail investors onto a special platform where trading firms will bid to offer them the best price. The trading will not be visible to the public.
The Securities and Exchange Commission approved the so-called “Retail Liquidity Program” on a pilot basis after months of deliberation and despite the opposition it faced from many corners of the industry.
The programme serves as a direct challenge to the current industry practice that has seen most trades from retail investors directed to a few Wall Street firms that buy or sell the shares before the trades can reach one of the nation’s regulated exchanges.
This practice, known as internalisation, has played into the broader increase in the amount of stock trading going on away from the public eye in the so-called dark markets. Since 2008, the portion of all stock trades in the United States taking place away from the exchanges has risen from 15 per cent to nearly 35 per cent, according to brokerage firm Rosenblatt Securities.
NYSE Euronext, the parent company of the exchange, has generally been critical of the growing dark markets. Just this week, the chief executive of NYSE Euronext, Duncan Niederauer, wrote in The Financial Times that that “more and more information is outside the public view and excluded from the price discovery process.”
“There is already evidence tha0t the evolution of our two-tiered system is undermining confidence in markets for equity issuers and investors,” Niederauer wrote. “This erosion of faith in the efficiency and effectiveness of capital markets will ultimately hurt capital formation, thereby damping job creation.”
With the retail liquidity programme, NYSE Euronext is using a different strategy and attempting to move some of its own trading into the dark. Joseph M. Mecane, executive vice-president for cash trading at NYSE Euronext, said on Friday that “this is what is being encouraged throughout the rest of the market and we need to be able to compete with it.”
Critics of the programme have said that it could lead to an increase in trading away from the exchanges and accelerate the fragmentation of the nation’s stock markets. The proposal has also been controversial because it will allow the exchange to execute stock trades in increments of less than a penny. This has been possible in off-exchange venues but until now it has been illegal for the exchanges.
In its approval letter, the SEC rejected concerns that the programme could “cause a major shift in market structure,” though it noted that it would “monitor” the programme during its pilot period for any unexpected effects.
Executives at Nasdaq and Direct Edge, both of which operate regulated exchanges, have said that they have plans to intoduce similar proposals if the retail liquidity programme was approved. Neither had done so as of Friday.
© 2012 The New York Times News Service
