On Thursday, the NYSE Euronext (NYSE:NYX) received approval from the Securities and Exchange Commission for a one-year pilot program for an independent exchange that will “mimic” dark pools. This comes in an attempt to gain retail investors and market share for the exchange but is likely an action that will anger brokers who see business potentially exiting.
In a Dow Jones story by Andrew Ackerman and Jacob Bunge, the 12-month program, named the Retail Liquidity Program, represents the first U.S. stock exchange that will give retail investors an improved price, depending on the trade, similar to what’s been available to institutional traders including hedge funds or pension funds.
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
This improvement could be a 10th of a penny higher or less.
In addition, the new program will operate similarly to a “dark pool.” What does this mean? Currently, these pools anonymously trade large blocks of stock for institutions. They are private trading platforms and for the NYSE, they will now have a second exchange that will trade shares prior to hitting the NYSE trading floor.
This program is set to begin on Aug. 1.
On the plus side with the news, the NYSE will gain an opportunity to keep up with the dark pool competition and get a piece of the piece against firms such as Knight Capital Group Inc. (NYSE:KCG) and UBS AG (NYSE:UBS), noted Dow Jones. They have gained market share through this type of trading and now NYSE wants their turn.
The inclusion of the program may come at a good time as the exchange’s market share in the companies its trades declined below 25 percent in May, reported Bloomberg, as compared to May 2003’s 82 percent thanks to increasing internalization by brokers.
As noted, the NYSE has said the program will benefit the individual trader but analysts are skeptical that it’s a dark pool.
NYSE disagrees. Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext said to Bloomberg, “The big difference in the program is it’s still operated in the exchange framework. While we are able to segment retail customers, all the rules about how we treat retail customers differently are filed and standardized and submitted to the SEC.
“Dark pools can discriminate with complete discretion.”
While the NYSE and retail investors may applaud the change, the naysayers will include brokers from the exchanges. Their opposition to private trades has already started.
Back in April, Chicago Mercantile Exchange traders displayed their discontent with private trades by protesting a large, private block options trade on eurodollar futures; they stopped trading the product in the morning, threatening to dry up volume in the product.
The NYSE isn’t the only exchange to venture into the dark world of dark pools. Nasdaq supposedly also has a plan, reported the Wall Street Journal.
But in the end, whether retail investors benefit from this and not just the NYSE joining the pack for their own interests, is yet to be determined. Usually it’s hard for the little guy to win on Wall Street.