July 5 (Bloomberg) -- The New York Stock Exchange’s plan to lure more stock orders from individuals was approved by the U.S. Securities and Exchange Commission, dealing a setback to Wall Street firms that increasingly keep the business for themselves.
NYSE Euronext said in a statement the program will start Aug. 1. The company sought permission in October for the one-year pilot to lure orders by offering retail brokers potentially better prices than are available elsewhere. Under the plan, a class of retail liquidity provider at the NYSE would be allowed to reserve and keep hidden bids and offers for smaller investors as long as the prices beat those in the rest of the market.
The exchange operator’s program may help it attract orders that otherwise would be retained by financial firms and matched through a process known as internalization. NYSE market share of trading in companies it lists has fallen to less than 25 percent in May from 82 percent in 2003, data compiled by Bloomberg and Barclays Plc show.
“Ultimately, we think it’ll result in more liquidity and better prices to flow back to retail customers,” Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext, said today in a phone interview.
Most orders from individual investors who trade through retail brokers are sent to wholesalers, such as Knight Capital Group Inc. and Citadel LLC, who pay the brokers for sending them. The wholesalers can then execute the orders internally, instead of going to an exchange, as long as they provide prices that match or improve upon levels in the public markets.
Orders from investors are attractive to market makers and asset managers because the senders, unlike professional traders, aren’t expected to know more about short-term price movements than the firm they’re dealing with. Soliciting the orders could lure more trading to NYSE, Mecane said.
NYSE Euronext’s plan would provide an incentive to retail brokers, such as E*Trade Financial Corp. and TD Ameritrade Holding Corp., to send orders directly to the exchange. As more retail orders come in, the institutional investors who trade on the exchange would see more retail orders, attracting institutional investors and more business to NYSE Euronext.