SEC Approves NASDAQ’s Retail Liquidity Program

On August 1st, 2012 NYSE’s Retail Liquidity Program went into effect, with its main result being a Knight runaway market making algo wreaking havoc on the marketplace, especially for Knight itself – Knight had apparently coded incorrectly for interaction with NYSE’s RLP.

NYSE’s RLP has been notable in several important ways. First it set precedent for sub-penny trading on stock exchange. Secondly it set precedent – not in a good way in our opinion – for segmenting order flow on an exchange that can only interact with certain parties. Third it raised the bar of complexity in our fragmented markets.

Once approved all industry professionals knew that it would be only a matter of time before other stock exchanges followed suit. On November 19th, 2012 NASDAQ did file for its own Retail Price Improvement Program (RPI). On this past Friday, February 15th, the SEC gave its blessing.

NASDAQ’s RPI program shares much in common with NYSE’s RLP program, however it has some important differences we feel are worth talking about:

1)      While NYSE created a category of exchange members – Retail Liquidity Providers, who must best the NBBO at least 5% of the trading day, NASDAQ creates no such category, or requirement.


2)      While NYSE’s program had retail orders only interacting with contraside RPI orders, and not with any other types of orders, NASDAQ’s program is more inclusive. A retail order in NASDAQ’s RPI program would first interact with designated RPI contraside orders, but subsequently could interact with other resting hidden NASDAQ orders, depending on whether the retail order was designated as Type 1 or Type 2:

  • The Exchange notes that other price improving liquidity may include, but is not limited to: booked non-displayed orders with a limit price that is more aggressive than the then current NBBO; midpoint-pegged orders (which are by definition non-displayed and priced more aggressively than the NBBO); non-displayed orders pegged to the NBBO with an aggressive offset.  Orders that do not constitute other price improving liquidity include, but are not limited to: orders with a time-in-force instruction of IOC; displayed orders; limit orders priced less aggressively than the NBBO.


3)      While NYSE’s RLP program has retail orders executing at one price point – the least aggressively price improved RPI, NASDAQ’s program has retail orders execute at various price points. This appears to us as superior matching relative to NYSE’s system. Liquidity providers are held to the prices they post on the RPI feed, and the matching would seem to encourage less queue gamesmanship without an RPI putting his money where his mouth is.

Orders that are submitted by NASDAQ exchange members for the RPI program have an advantage over other entered orders – namely these orders have priority in the exchange’s matching engine over non RPI orders, regardless of price.  This is why NASDAQ is adamant in their rule filing that such orders must be Retail Orders. They will be watching for hanky-panky, and if, for example, high-frequency-proprietary-trading-firms send non-retail order flow as retail, they will get their wrists slapped.

It is interesting to us that the SEC seems to really like NASDAQ’s proposal. They remark that they find appealing the fact that institutional investor order flow will have the potential to interact with the desirable dumb uninformed retail order, which they do not have the potential to interact with on the NYSE. NASDAQ’s RPI program appears to be superior on several levels than the NYSE RLP, to be sure.

However, we lament the further complexity unleashed into our market’s plumbing. This program introduces a new priority into the price-time priority model. It further sets precedent for order segmentation. Heck – the SEC acknowledges in this rule filing that everybody wants to touch the dumb uninformed orders! Sadly, instead of attempting to return us to a simple democratic all-orders-are-created-equal approach to market supply and demand, the SEC believes that creating more complexity, with increased targeting of the poor dumb uninformed retail order, is the way to institute market fairness, and a level playing field.