The Nasdaq Stock Market told members Wednesday evening that it would begin testing its Retail Price Improvement program, starting Thursday.
The program is set up to allow marketable orders from retail investors to interact with hidden orders from institutions, before going into public trading. The interaction will give institutions the chance to grab the orders by providing prices better than the best bid or offer available nationally, at increments of less than a penny a share.
The program has not yet been approved by the Securities and Exchange Commission. The New York Stock Exchange began its own Retail Liquidity Program on August 1, with similar features.
Nasdaq said it plans to introduce the price improvement feature on its testing facility today (February 14, 2013). User testing will also occur in the stock market’s production system on Saturday, March 9, 2013.
In the first test, all Nasdaq members can try out the feature. In the March test, members “will need to register and be approved as a Retail Member Organization to submit retail orders,’’ the exchange said.
The New York Stock Exchange said its Retail Liquidity Program achieved average daily volume (ADV) of 9.5 million shares in trading conducted in January. That is five times the 1.9 million shares that traded daily in its first month last summer.
The program and variants introduced by Nasdaq, Direct Edge and BATS Global Markets a significant change in exchange operations. By approving the programs, the Securities and Exchange Commission allowed them for the first time to give improved prices to one segment of customers and also to use subpenny pricing to achieve the goals.
In its approach, Direct Edge does not offer sub-penny pricing on either of its EDGA or EDGX exchanges. Its tack, called Retail Order Designation, seeks to identify retail flow by asking retail liquidity providers to self-identify that the liquidity is retail. A market participant responding to that identified flow gets a rebate of 0.0032 per share, instead of providing price improvement.
The programs are designed to help the exchanges compete with the matching of orders that takes place in brokers’ own pools of capital and other competing venues, where prices are not publicly displayed.
In January, 2.4 billion shares a day, or 36.7% of all trading in equities, occurred in broker pools, dark pools and other off-exchange systems, according to data compiled by BATS Global Markets.
Nasdaq, in its plan, estimated the average price improvement would work out to 50 cents on a 500-share order.
