Price Improvements in Pipeline for Retail Investors

Last week, NYSE Euronext filed a proposal with the SEC to launch a new Retail Liquidity Program in securities traded on NYSE and NYSE Amex, which is pending SEC approval. Here are some important aspects of this unique program:

  • Cost savings for retail investors. Retail investors through their brokers can reduce trading costs through an efficient process that provides access to enhanced liquidity at better market prices. Price improvement means executing an order below the best displayed offer for buys or above the best displayed bid for sells.
  • All trading members can participate. All NYSE and NYSE Amex members can compete as liquidity providers and offer price improvement to retail orders.
  • Transparency. When price-improving interest is available, a “Retail Liquidity Indicator” (RLI) is displayed to the public in the exchange data feed.
  • Displayed quotes on exchanges are protected. Retail orders can receive better prices, but executions at the National Best Bid and Offer (NBBO) can trade with Exchange-available liquidity also.

The program introduces two new classes of participants: Retail Member Organizations (RMOs) and Retail Liquidity Providers (RLPs). RMOs are retail trading firms and intermediaries that can submit retail orders, while RLPs are liquidity providers offering price improvement to retail investors. Any exchange member can participate as a liquidity provider, not just RLPs, but RLPs have additional requirements to provide price improvement for at least 5% of the trading day in a given security. RLPs receive certain economic benefits for meeting this requirement. To qualify as an RLP, a member firm must, among other criteria, already be approved as a DMM or SLP, of which there are 18 firms today, and growing. That’s a lot of potential liquidity providing on day one.

The diagram provides an example of how the program works. Say the best quoted market prices in a security are bid $30.00 - offer $30.03 and there are 1300 shares of exchange interest available at the bid and 1300 shares available at the offer. A NYSE liquidity provider (RLPs and/or members) submits a Retail Price Improvement (RPI) order to buy at $30.01 for 500 shares (STEP 1). NYSE’s data feed notifies the RMO of the availability of price improvement interest on the bid side (STEP 2) and the RMO sends in a retail order to sell 500 shares (STEP 3). The order executes at $30.01 and the retail investor saves $5 on the 500-share trade, or $0.01 per share!!! If the RMO order was larger than the RPI order, say for 1000 shares, then the retail investor could also choose to interact with interest on the exchanges with the additional 500 shares executed at the best displayed price of $30.00. 

NYSE's and NYSE Amex’s new Retail Liquidity Provider program is another unique aspect of its market design, which is focused on improving market quality (narrower spreads, greater depth) by enhancing the liquidity and diversity of trading participants. Other unique NYSE and NYSE Amex liquidity provider programs include Designated Market Makers (DMMs), Supplemental Liquidity Providers (SLPs), Floor Brokers as well as Lead Market Makers (LMMs) on NYSE Arca.

When you place an order with your retail broker, don’t forget to check where it is executed and if you received price improvement!