SEC Approves BATS Retail Liquidity Improvement Program (with Glen Barrentine Explanation)
The SEC recently approved a proposal by the BATS Y-Exchange (the "BATS" to adopt its proposed Retail Price Improvement Program (the "BATS Program") on a one-year pilot basis. See SEC Release 34-68303 (File No. SR-BYX-2012-019) (Nov. 27, 2012) (available at http://www.sec.gov/rules/sro/byx/2012/34-68303.pdf) (the "Approving Release"). The BATS Program is largely based upon the NYSE's previously approved Retail Liquidity Program. See SEC Release No. 67347 (SR-NYSE-2011-55/ SR-NYSEAmex-2011-84) (July 3, 2012). The BATS Program provides for two new order types consisting of "Retail Orders" and "Retail Price Improvement Orders". All BATS members and sponsored participants would be permitted to submit Retail Price Improvement Orders, which must express firm interest to price-improve on the best protected bid or offer by at least $.001 per share. The presence of a Retail Price Improvement Order would be communicated through the Consolidated Quotation System and the Nasdaq UTP Plan through the use of a "Retail Liquidity Identifier" that would reflect the symbol and the side (buy or sell) of the Retail Price Improvement Order but, significantly, not the price or size thereof. A new class of market participant, called "Retail Member Organizations", would be able to submit Retail Orders representing orders from retail investors to BATS. Retail Orders would execute first against available contra-side Retail Price Improvement Orders and, if not completely filled, against other liquidity available on BATS.
The BATS Program differs from the NYSE's existing Retail Liquidity Program in three ways. First, the NYSE's Retail Liquidity Program creates a category of members, Retail Liquidity Providers, who are required to maintain an order that betters the protected best bid or offer at least 5% of the trading day in each assigned security. The BATS Proposal does not create such a category of users. Second NYSE's Retail Liquidity Program does not permit the execution of Retail Orders against other resting non-displayed liquidity in contrast to the BATS Proposal. Finally, under the NYSE'S Retail Liquidity Program, Retail Orders execute at the single price at which the order will be fully executed. The BATS Proposal allows Retail Orders to execute at multiple price levels rather than a single price level.
In connection with the Program's approval, the SEC also granted exemptive relief from Rule 612 of Regulation NMS, which prohibits a national securities exchange from accepting or ranking orders priced greater than $1,00 per share in an increment smaller than $.001. In addition, BATS obtained no-action relief from the SEC's Division of Trading and Markets from the provisions of Rule 602 of Regulation NMS (the "Quote Rule") for failing to collect, process and make available the best bid, best offer, and quotation sizes communicated by members of the Exchange. In its request, BATS stated that the Retail Price Improvement Orders, whether considered on their own or together with the Retail Liquidity Identifier that indicates their existence, do not meet the definition of "bid" or "offer" in Rule 600(b)(8) of Regulation NMS because they do not communicate a specific price. The request by BATS also includes a historical discussion of the Quote Rule including the recent discussion of "actionable IOIs" in the SEC's release entitled "Regulation of Non-Public Trading Interests." See SEC Release 34-60997 (Nov. 13, 2009) (proposing to amend regulatory requirements applicable to non-public trading interests in the national market system) (available at http://www.sec.gov/rules/proposed/2009/34-60997.pdf).
Click here to view letter in full (links externally to SEC website).Readers interested in further explanation of the background to this rule change may contact Glen Barrentine.