Bloomberg News

NYSE Seeks SEC Approval for Plan to Win More Retail Orders

October 12, 2011

(Updates with analyst comment in final paragraph.)

Oct. 12 (Bloomberg) -- NYSE Euronext proposed creating a new class of traders at the New York Stock Exchange that may help it win more business from firms that handle orders from individual investors.

The New York-based company filed for Securities and Exchange Commission permission to begin a pilot program for what it called retail liquidity providers. It would let trading firms say certain bids and offers are for small investors, so long as the prices are better than what is publicly available. Quotes from the firms wouldn’t be visible to everyone.

NYSE Euronext wants more retail orders because they are usually more profitable for liquidity providers than transactions from professional investors, said James Angel, a finance professor at Georgetown University in Washington. The exchange has lost market share of trading in companies it lists to 26 percent last month from 82 percent in 2003, data compiled by Barclays Plc and NYSE Euronext show.

“Retail order flow is the cream of the crop,” Angel said during an interview today in Chicago. “Everyone wants to trade with the dentist from Dayton, not the best and brightest running a prop trading shop on the Street.”

Knight, Citadel

Most orders from individual investors who trade through retail brokers are sent to wholesalers, such as Knight Capital Group Inc. and Citadel LLC, who pay the brokers for sending them the transactions. The wholesalers can then execute the orders internally, instead of going to a public exchange, as long as they provide prices that match or improve upon levels in the public markets.

NYSE Euronext’s plan would provide an incentive to retail brokers to send orders directly to the exchange, which may dissuade them from selling orders to wholesalers. As more retail orders come in, the institutional investors who trade on the exchange would see more retail orders, attracting more business to NYSE Euronext.

“What we’re trying to do is replicate and complement a lot of what already exists so we can fit into that ecosystem a lot better,” Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext, said in a telephone interview.

NYSE Euronext said quotes for retail orders won’t be displayed, meaning neither the number of shares an investor is willing to buy or sell nor the price will be shown. The exchange will have a special label in its data feed, indicating whether the orders are requests to buy or sell.

“This is basically a dark pool inside the New York Stock Exchange,” Larry Tabb, founder of New York-based financial- market research and advisory firm Tabb Group LLC, said in a telephone interview, referring to a type of private venue. “It’s absolutely a way to compete against the internalization and drive more order flow.”

--Editors: Nick Baker, Chris Nagi

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Nina Mehta in Chicago at nmehta24@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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