Retail trading activity continues to dominate market headlines and influence market liquidity dynamics. Growing retail volumes have caused drops in exchange share of trading activity, as a larger share of market activity occurs on a bilateral basis between retail brokers and market makers.
Exchanges have limited ability to truly compete for much of the volume executed by market makers away from the exchange. Much of this constraint is due to the service model offered by market makers, which includes bespoke price improvement and payment for order flow (PFOF) terms, as well as adjustments for disputed executions. However, exchanges are also on unequal footing when trying to fill an individual marketablei order; market makers trading off exchange can trade at price increments as small as $0.0001, while market makers contributing to price discovery on exchange must always quote in increments of $0.01.
In response to these commercial and regulatory limitations, NYSE Group has distinct offerings targeting retail order flow. These programs encourage competition for non-marketable limit orders obligated to display in the market and provide price improvement opportunities for marketable orders.
NYSE pioneered the RLP concept in 2012, and currently offers RLP for NYSE-listed securities on NYSE and all other securities on NYSE Arca. RLP allows non-displayed orders to offer price improvement to incoming retail orders.
One important constraint on RLP activity is the limited pre-trade pricing transparency. While resting RLP orders trigger a market data indication, there is no suggestion as to the available size or the amount of price improvement available from any given RPI order. This leaves firms with prospective RMO orders uncertain of the full benefit they could receive on any one particular order, making an off-exchange fill with higher average expected price improvement more favorable. Further, exchange RPI orders must move in increments of $0.001, which limits flexibility.
As retail participation remains high nearly one year into the pandemic, many market participants are seeking ways to interact with this liquidity. RLP offers a distinct all-to-all approach for interaction with marketable retail orders, leveraging the most flexible order pricing available on exchange. At the same time, the relatively limited growth in RLP volume during this period highlights an important constraint to exchanges competing for this order flow.
i“Marketable” refers to market orders and orders priced at or through the opposite best bid or offer
iiThe retail attestation definition is available at /publicdocs/nyse/markets/liquidity-programs/NYSE_Arca_Retail_Modifier_Attestation_Form.pdf
ivEffective/quoted is a common execution quality metric for retail brokers. Further explanation available at https://us.etrade.com/trade/execution-quality