November 30, 2011
The NYSE and NYSE AMEX Retail Liquidity Program should not be allowed for the following reasons:
1. It will further reduce financial transparency, retail investors do not need an additional dark pool/hidden order venue. Retail investors can not do meaningful price discovery due to the existing dark pool/hidden liquidity, reserve/display size orders, and the prevalence of high frequency traders 100/200 share bids and asks. The NYSE DMM's and the participating marketmakers will have full access to the pricing and share quantities of retail orders while the retail investor will have no comparable information concerning dark/hidden liquidity to use in determining appropriate pricing when entering a limit order. If based upon the available information, it benefits the liquidity providers to offer price improved liquidity they will, if it doesn't they won't. It will provide less transparency and make worse the existing unequal playing field for the retail investor that exists today. The marketmakers refer to the retail investors orders as "dumb" order flow and want to keep it that way by reducing transparency and allowing for more hidden/dark orders so they can game the retail investor.
2. While the program purports to benefit retail investors, it will primarily benefit the NYSE and participating marketmakers providing the hidden liquidity. Retail investors already can and do get price improvements on market and marketable limit orders(buy orders priced above the quoted ask, and sell orders priced below the quoted bid) through their brokerage firms from numerous existing marketmakers, dark pools and exchanges that promote/allow hidden orders. However, due to the lack of a "trade at" rule, the prevalence of dark/hidden orders, marketmakers doing price improvements, high frequency trading,and brokers internalizing orders, retail investors have extreme difficulty getting executions on non-marketable limit orders(for example placing a buy just above the quoted best bid or just below the quoted best ask). The NYSE and AMEX are one of the few venues still left where a retail investor can route a non-marketable order(go high bid or low offer) and still have a reasonable chance of getting an execution and not having marketmaker and professional dark/hidden orders get filled ahead of theirs at an insignificant price difference. The retail investors non-marketable limit orders are the last to get filled at most venues in the current market structure environment. If NYSE and NYSE AMEX are allowed to implement this program it will greatly reduce the retail investors ability to get an execution when placing an order that is high bid or low offer, or that later becomes the high bid or low offer, as the liquidity providers orders will take priority due to the insignificant price improvement. The retail customers non-marketable orders will serve as markers, advertisements, and sign posts facilitating the execution of marketmaker's non-displayed orders where they will actually receive the "price improvement"s at the expense of the retail investor.
3. There needs to be some balance in the marketplace. Internet stock message boards are filled with retail investors complaints about how their sell order was low offer, and the only shares displayed, for much of the trading day yet they did not get a fill even though many trades occurred at their price. Retail investor confidence needs to be restored, or eventually the NYSE's only customers will be the high frequency traders. Creating more venues for price improvement of retail investor marketable orders on the surface may appear to be good for the retail investor, but it isn't good for the retail investors if it further reduces their already greatly limited ability to get limit orders filled when they are the high bid or the low offer. Many believe a "trade at" rule should be implemented to solve this problem, many are dead set against a "trade-at" rule. A fair and equitable solution that would satisfy both sides in many ways without dramatically changing existing market structure, rebate programs, or result in increased retail investor commissions would be a 50/50 "trade at" rule: half of every marketable order would go the the "lit" exchanges displayed best bid/ask and the other half marketmakers would be allowed to internalize, allocate to dark pools/hidden, or price improve/match themselves.
4. This program would result in more sub-penny executions. Trading and printing in sub-penny increments should be banned for all securities, including those priced under $1.00. No other good or service in the United States is priced in an increment below our smallest currency denomination of 1 cent, it makes no sense for stocks to be. Sub-penny only benefits marketmakers and exchanges, who use it against the the retail investor.
Allowing the RLP to be implemented would just shift routing of some retail investor marketable order to the NYSE and NYSE AMEX away from other venues, yet remove one of the few places a non-marketable limit buy on the bid, or limit sell on the offer, still has a reasonable possibility of getting filled. Since the retail investor can already get price improvements form other marketmakers and venues, the real beneficiaries of the program would be the NYSE/NYSE AMEX and the marketmakers participating in the program. While leveling the playing field for the NYSE and NYSE AMEX to compete with other venues is a fair objective, the SEC should make take steps to make the playing field level for the retail investor first.