Bats Global Markets Inc., the third-largest U.S. stock exchange operator, plans to create a program to draw orders from individuals to one of its two markets.
The company asked the Securities and Exchange Commission for permission to compete with the New York Stock Exchange’s initiative to attract buy and sell requests from smaller investors by offering better prices than are available to other market participants. Nasdaq OMX Group Inc. and Direct Edge Holdings LLC have said they’re also working on plans similar to NYSE’s 12-month pilot program, which began on Aug. 1.
Exchanges are eyeing orders sent to so-called equity wholesalers, a category of market makers that executes orders for individuals supplied by brokers such as TD Ameritrade Holding Corp. and Charles Schwab Corp. Knight Capital Group Inc., Citadel LLC, UBS AG and Citigroup Inc. are the largest wholesalers trading orders away from exchanges at prices that match or improve on the levels offered publicly, a business known as internalization.
“This is a play for market share,” Alison Crosthwait, former managing director for global trading strategy at broker Instinet Inc. in Toronto, said in a phone interview. “Exchanges are better regulated and have more transparency, but the difference is not huge. It’s more about competition between exchanges and internalizers,” she said.
The SEC must approve yesterday’s filing from Lenexa, Kansas-based Bats before its retail price improvement program can become effective. The initiative allows the exchange’s member firms to supply quotes that are at least a tenth of 1 cent better than the best price at which other market participants can trade. The orders will not be displayed publicly, as is also the case at NYSE.
Daily U.S. equity volume averaged 6.66 billion this year, 15 percent less than the average from last year, according to data compiled by Bloomberg. That compares with 8.52 billion in 2010. On Aug. 13, volume of 4.5 billion shares reached the lowest level since at least 2008, excluding holidays.
“A significant percentage of the orders of individual investors are executed over-the-counter,” Bats BYX Exchange said in its filing. About a third of U.S. equities volume takes place away from exchanges, including orders from retail clients that can be executed immediately, according to data compiled by Bats. “The exchange believes that it is appropriate to create a financial incentive to bring more retail flow to the public market,” Bats said.
The Securities Industry and Financial Markets Association told the SEC in a March letter that “sub-penny increments would not contribute to the maintenance of orderly markets” and discrimination among users should be discussed more thoroughly before NYSE’s program was implemented. It urged the SEC not to approve the project.
Bids and offers at increments of less than 1 cent currently aren’t permitted by the SEC since the disadvantages are seen as outweighing the benefits of minimally better prices. The SEC exempted NYSE Euronext’s retail programs for the New York Stock Exchange and NYSE MKT from the ban.
Knight, based in Jersey City, New Jersey, experienced a software malfunction that led to a $440 million loss when it made changes to get ready for NYSE’s program on Aug. 1. Chairman and Chief Executive Officer Thomas Joyce said the mishap wasn’t NYSE’s fault. Knight ceded most of the company to six investors led by Jefferies Group Inc. that provided $400 million in equity financing on Aug. 6.
Transactions involving almost 2.7 million shares with an average of $0.0016 in price improvement per share took place through NYSE Euronext’s retail liquidity program on Aug. 9, the company said in a statement the next day. The average trade size in the program was about 2,300 shares, compared to less than 300 in NYSE-listed companies at the exchange operator. Brokers provided superior prices to individual investors across more than 540 companies, the company said.
Brokers supplying orders for retail clients on NYSE include high-frequency firms Hudson River Trading LLC, Getco LLC, RGM Advisors LLC, Tradebot Systems Inc. and two units of Virtu Financial LLC, the company said. Keara Everdell, a spokeswoman for NYSE Euronext in New York, said the exchange operator is pleased with the “early success” of its program.
Bats will allow retail customers to receive executions at multiple prices, enabling them to get the benefit of shares available across different bids if they’re selling stock or many offers if they’re buying. NYSE provides executions at a single price -- the lowest bid or highest offer within the program that completes the investor’s transaction.
“We believe customers will find the Bats RPI program to be a more innovative approach because it will maximize price improvement for those who use it,” Randy Williams, a spokesman at Bats, said in an e-mail.
Any Bats member firm can supply bids and offers to retail customers. Unlike the NYSE program, Bats won’t have separate groups of firms with different fees providing liquidity.
William O’Brien, CEO of Direct Edge, said last month his company would offer a plan that focuses on improving both the price and size of executions for retail customers. The company is preparing a regulatory filing for its version for retail investors, Jim Gorman, a spokesman, said yesterday.
Nasdaq OMX also intends to compete with NYSE’s retail liquidity program.
The New York-based company’s effort will take the form of automated auctions for orders from individuals, Eric Noll, executive vice president for transaction services, said at a conference on May 10. A written presentation said the auctions will be similar to those run on U.S. options exchanges, in which market makers vie to win the investor’s order by providing the best price. The auctions last less than a second.
-- With assistance from Rita Nazareth and Julia Leite in New York. Editors: Chris Nagi, Jeff Sutherland