NYSE is getting into the Dark Pool game.

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In a controversial decision, the SEC approved the New York Stock Exchange’s “Retail Liquidity Program” that will allow the Big Board to execute some trades off of the traditional exchange.

The program will direct trades from retail investors onto a special, off exchange platform.   At that point, trading firms will place bids to offer these investors the best price.   The trading will not be visible to the public.   The program designed by the Big Board as a play to recapture market share and it is scheduled to start later this summer.

To argue the benefit, dark pools or “off exchange” trades enable investors to attain better pricing.   Especially in the high frequency trading sector, tremendous growth has been triggered in part because of exchange traded funds (ETFs) looking for better deals.

To argue the detriment, it could expose the NYSE to some of the problems that have long plagued dark pool transactions, such fraud and market manipulation.

Most of all, the move is really a reflection of the fact that exchanges are now publicly traded entities that must answer to shareholders by producing profits.   There is certainly a profit motive for the exchanges, as they have seen volumes decline as dark pools have grown in popularity.    This issue was recently discussed in connection with rebates being paid to brokers in return for higher volumes of business.

The NYSE Dark Pool experiment is an effort to deal with the current industry trend that has seen many trades from retail investors directed to a few Wall Street players that buy or sell the shares before the trades can reach one of the regulated exchanges.

Further, some critics of the NYSE program argue that it could cause an increase in trading away from the other exchanges but SEC intends to monitor the program during its pilot period for any unexpected effects.

Anna Timone (195 Posts)


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