You may remember prior communications from us detailing the NYSE’s proposed Retail Liquidity Program (damn that “L” word). Why would the NYSE propose an internalization program similar to the very programs from other exchanges that it vehemently opposed (even to the point where NYSE and Direct Edge senior executives nearly came to fisticuffs on an industry panel)? Do you all remember NYSE’s comments at the SEC’s June 2nd 2010 Market Structure Conference?

“We must consider the toxicity levels on exchanges as we continue to filter increasing levels of order flow before accessing public markets, disadvantaging displayed limit orders, the very orders we claim to want to encourage…We should make sure that volume isn’t migrating to the dark for unfair structural reasons or regulatory arbitrage. Existing practices, such as subpenny price improvement should be examined to see whether they violate the spirit if not the specifics of existing regulation.”

The whole RLP move had us scratching our heads, yet nevertheless we felt we should comment to the SEC, and we did so in a public comment letter. We were the first to comment, but not the last. There are some real meaty comment letters by other industry participants, and we would like to alert you to them this morning:

Knight Trading: http://www.sec.gov/comments/sr-nyse-2011-55/nyse201155-9.pdf

Ameritrade: http://www.sec.gov/comments/sr-nyse-2011-55/nyse201155-22.pdf

BATS: http://www.sec.gov/comments/sr-nyse-2011-55/nyse201155-29.pdf

Those three letters merit reading in their entirety, but we’ll tease a passage from each of them for your quick reading this morning.

Knight is concerned about capacities, gaming and costs… and apparently another May 6th:

“Moving to a tenth of a penny minimum tick effectively takes the NMS market from 100 price points between each dollar level to 1,000 price points. Market participants need to consider the impact that will have on a number of factors including trading technology and capacity, operational costs, execution quality, and liquidity and gaming.”

Ameritrade is tired of their retail customer’s limit orders getting stepped in front by sub-penny front-running dogs:

“Additionally, retail investors who place limit orders often complain about executions that occur in sub-penny increments ahead of their orders, and often point to sub-penny printing as the reason their order is not being executed. The filings additionally state that the NYSE “will monitor the Program in an effort to identify and address any such behavior” but provide little detail regarding how NYSE will prevent such behavior or how NYSE will address such behavior. Rather than allowing the practice, the Firm supports the elimination of sub-penny printing. In other words, TD Ameritrade believes that printing always should occur at the same increments that trading occurs.”

And BATS brings up two-tiered markets, “flash orders”, and best-execution obligations:

“BATS is concerned that as proposed (i) NYSE’s Retail Program is unlikely to actually result in greater price competition for Retail Orders, (ii) NYSE’s proposal to issue an IOI on its proprietary data feed when RPI orders are present invokes elements of “flash orders” and raises serious questions about two-tiered markets and best execution obligations.”

The next few weeks are going to be very interesting. We suggest keeping your eyes peeled for how the SEC referees this one, as well as stocking up on popcorn. It will be entertaining we guarantee.