The Securities and Exchange Commission has postponed a decision on proposals by the New York Stock Exchange and its sister exchange NYSE MKT to loosen the requirements of their retail liquidity programs.
Under the proposed amendments, the exchanges want to change their policies so that a broker need only attest to the fact that “substantially all” of the orders being funneled into the program are retail.
The regulator was originally scheduled to rule by March 21, but, in a filing last week, stated it needed more time to reach a decision. It will now rule by May 5.
The move by the SEC comes in the wake of criticism by the Securities Industry and Financial Markets Association over the plans by the NYSE and NYSE MKT, as well as similar plans by Nasdaq and BATS’ BYX exchange.
All four exchanges offer similar programs targeting retail order flow and all four have asked the SEC for permission to loosen the requirements governing the programs.
The exchanges’ programs entice bokers to send them their retail flow by promising to ‘price improve’ the orders, or fill them at prices better than the prevailing national best bid or offer.
As they are now constructed, the exchange programs require participating retail brokers to attest to the fact that “any” order routed to an exchange is indeed a retail order. That would change to “substantially all” of the orders be of retail origin.
NYSE and NYSE MKT told the SEC that the wording change would make it possible for more brokers to participate in their programs.
“The exchange is proposing a de minimis relaxation of the retail member organization attestation requirement in order to accommodate these system limitations and expand the access of retail customers to the benefits of the program,” the NYSE explained in its January filing.
In their filings, the exchanges told the SEC that some large brokers were reluctant to participate in their programs because their systems were unable to distinguish between retail orders and non-retail orders.
For its part, SIFMA does not view the change as “de minimis.” In a seven-page letter to the SEC dated March 11, the broker-dealer lobbying group complained that relaxing the attestation requirement would corrupt the intent of the program.
In its letter, SIFMA reminded the SEC that the programs are intended to benefit retail investors only. “Weakening the standard to allow some non-retail orders represents a material and problematic departure from the programs originally considered by the Commission,” SIFMA told the SEC.
SIFMA is concerned that the new wording is “so vague that it could allow a material amount of non-retail order flow to qualify for the programs,” it said.
The group did not ask the SEC to disapprove the exchanges’ proposals. It only wants the regulator to conduct a “careful examination” of the impact the proposals would have on the goals of the retail liquidity programs.
The exchanges established the programs last year in order to compete with broker-dealers’ internal mechanisms that intercept and match retail orders before they make it to an exchange.
The NYSE’s retail liquidity program has not drawn substantial volume since launching August 1. In January, the NYSE processed about 9.5 million shares per day, on average, under the program, the exchange operator reported.
That equates to 1 percent of the total 933 million shares per day traded on average by NYSE in January, according to statistics from BATS Global Markets website.
