NYSE Retail Liquidity Program: An Innovative Approach to a Challenging Problem

Executive Summary

As internalization becomes easier, the New York Stock Exchange and other exchanges are situated between a rock and a hard place. If the exchanges do nothing, technology and connectivity trends will weaken their structural and economic foundation. To protect both price discovery and capital formation processes, exchanges need to be able to try new strategies to attract order flow into the public market, lest they be eroded by the inevitable grind of technology and regulatory arbitrage. The NYSE RLP is the first, and won’t be the last, exchange program developed to alter this mix.

The Retail Liquidity Program (the “Program”) is designed to attract retail order flow to the NYSE. Investors will now be able to post more-aggressive (sub-penny) limit orders, which will not be fully displayed and will only interact with specifically-designated retail orders. All investors will be able to post sub-penny limit orders. Specifically-designated retail liquidity providers will receive the best posting economics; however, brokers will be able to achieve comparable liquidity-provider pricing if they reach certain RPIO thresholds.

NYSE’s RLP program also threatens to increase price and liquidity fragmentation (moving from pennies to sub-pennies), create multiple tiers within the market (as only “retail” investors will be able to access the RLP), and upset a number of their larger clients, who have active internalization and dark pool programs.

While the NYSE RLP program has benefits and challenges, the NYSE from both a competitive as well as a market quality perspective needs to pursue this Program. Given the trends toward internalization and exchange disintermediation, the Big Board needs to develop new and innovative ways to wrestle order flow back from the brokers and ATSs.
In the end, the hope is that retail firms, wholesalers and the NYSE can manage this Program to the benefit of investors and a better market structure will be born – a market that instills confidence in all market participants alike.

The TABB Group Vision Note NYSE Retail Liquidity Program: An Innovative Approach to a Challenging Problem focuses on how an RLP program will attempt to bring retail flow to the Exchange, create price-improvement for retail investors, reduce internalization, and improve market quality. The report also covers the possible impacts on various types of market participants--  including exchanges, high frequency retail liquidity providers, wholesalers and dark pools; impending disruptions that may soon transpire within the current market structure; as well as potential opportunities that may arise as a result of an RLP program.