Will the Real NYSE Please Stand Up


The SEC approved the NYSE’s RLP program on July 3rd 2012.

Before we continue with this note, please briefly reflect on the irony of NYSE’s RLP internalization sub-penny dark-pool getting approval on July 3rd, and NYSE’s CEO opining on how dark liquidity has been bad for the markets in a July 4th op-ed in the FT. Finished? Ok, moving on…

The RLP program was proposed in October 2011, amended in early 2012, and received numerous industry comments on the SEC’s website, including our own, which was the first one the SEC received.

Today we point out, again, the hypocrisy of NYSE’s internalization program, by using NYSE’s own recent comments:

April 23rd, 2010: “When information concerning trading interest is excluded from the public quote stream, the quality of the price discovery process can be affected…Dark pools and other off-exchange trading venues are attracting a significant volume of advantageous marketable order flow away from displayed markets and exchanges, thus increasing the toxicity of order flow on Exchanges. The continued fracturing of liquidity has the potential to further limit order interaction, decrease liquidity, increase short-term volatility, and compromise the quality of the price discovery process.”

December 15th, 2010: “Separately, we reiterate our concerns about the broader growth trend for liquidity that does not participate in the price discovery process, of which flash orders are a component. Over the past four years, there has been a dramatic increase in the level of activity that is reported to the FINRA Trade Reporting Facility (TRF) almost tripling in some cases, with absolute values in excess of 40% in many small-cap names…In addition to concerns about when these increasing levels begin to impact the price discovery process, the increased TRF volume raises concerns about the toxicity levels on the public markets as increasing levels of attractive flows are skimmed from the public markets”


June 2nd, 2010: “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 sub penny price improvement should be examined to see whether they violate the spirit if not the specifics of existing regulation.”


July 3rd, 2012: The evaporating transparency of our equity markets is an unwelcome turn from recent lessons learnt. In the wake of the 2008 financial crisis, there was broad consensus that institutional and retail investors need markets to be open and transparent. Indeed, one of the primary regulatory objectives following the financial crisis was to increase the transparency of market trading. Yet, since January 2008, the share of stock trades executed through largely unregulated “dark pools” and other alternative trading venues has nearly tripled.”


You see, the problem is that with for-profit exchanges, it kind of doesn’t matter what the executives and employees believe. What they say and actually do has little correlation. They are for-profit. And if it means embarking on something they know is bad for the markets, like Flash Orders, Sub-penny pricing, or internalization, they will. RLP Program Q.E.D.


What can you expect now?


–          You can bet the other stock exchanges will be now filing their own versions of internalization programs in the coming weeks.

–          You can also bet that the internalizing brokerage firms – such as Knight, Citadel, and UBS – will likely be making sub-penny changes to their models; if it’s allowed for the exchanges, it must be allowed for them on a larger scale too (they will reason, anyway).

–          Liquidity will become more fragmented. Do you know you all will not be interacting with this new RLP dark liquidity? It will become tougher for institutions to execute.

–          Data costs will explode for the industry.

–          IPOs will become more difficult to manage. Think of all those infinite new sub-penny cancels and revisions!


Strap yourselves in folks and enjoy the ride. Thanks SEC.