The NYSE and Amex have stirred up a 'hornets nest' with a proposal to permit their members to quote in sub-pennies.  The "Retail Liquidity Program," as its called, would create dark pools on both exchanges - where members could vie for retail order flow with quotes only a tenth of a cent better than the market's best displayed prices. The rule proposal was filed in October and the 60-day comment period ran its course.  Yet industry players have asked the SEC to keep the comment period open to give the industry more time to digest the plan and its implications. The stakes are quite high.  If approved, the Program could upend one of the 4 planks of Reg NMS - specifically, the prohibition against sub-penny pricing -and possibly change trading behavior dramatically.  And then there are big trading houses, like Knight Capital Group, which could find itself competing with the exchanges as well as a highly sought-after customer.  Others are speaking out on the matter.

SIFMA believes the NYSE proposal raises "significant market structure implications that require additional time to be considered."

Hudson River Trading (HRT), a large market-making firm and NYSE member that would be eligible to quote in the new pools, sees "significant issues regarding competition among exchanges, ATSs and over-the-counter internalizers."

HRT MD Suhas Daftuar raised, perhaps, the most important consideration, namely - that the issues are too broad to be addressed in a proposal by a single exchange operator, and ought to be addressed with "comprehensive rule-making."

Currently, traders are ... not allowed to quote in sub-pennies, but they may trade in sub-pennies if it leads to better prices for customers. This exception has benefited brokers over exchanges, permitting wholesalers such as Knight to win order flow from retail brokers.  Wholesalers will "price-improve" retail orders by fractions of a cent over the market's best bids and offers On the surface, the NYSE proposal appears to be a swipe at wholesalers, such as Knight.  In reality, sources tell TRADERS MAGAZINE, any retail flow captured by the program would likely come from the wholesalers themselves.  Not every order that arrives at the wholesaler's front door is internalized, or traded against.  A sizable amount is routed out to other broker-dealers. It is this "exhaust" that the NYSE is eager to capture. Given that the ban on sub-penny quoting is a central tenet of Reg NMS, some believe it will be impossible for the SEC to approve the NYSE proposal. For More Info, go to  [Traders Magazine  12/27/11]