[by Howard Haykin ] The NYSE controversial plan that is intended to redirect retail order flow from broker-dealers - a "leveling of the playing field" - was approved by the SEC on Tuesday.  The rule amendment that sets this one-year pilot program into effect will be available on the exchanges operated by NYSE Euronext - each having this identical, singular objective:  to enable or empower the approved exchanges to provide better executions to orders of individual investors, thereby completing more vigorously for their order flow. The plan, dubbed "Retail Liquidity Programs," are scheduled to start Wednesday, 8/1/12. incomplete more are based on will enable them to compete with wholesalers (i.e., broker-dealer market makers) for retail order flow.  The programs aim to confer better pricing on retail orders than is available at the national best bid or offer.  In a statement, Joe Mecane, an NYSE Euronext executive vice president, said: "Providing price improvement for retail orders within an exchange environment affords individual investors new economic incentives and ensures greater transparency, liquidity, and competition throughout the U.S. cash equities marketplace." Reg NMS Exemption Granted. In granting its approval, the SEC exempted the exchanges from Regulation NMS’ sub-penny rule and agreed not to pursue the exchanges for violations of its bedrock Quote Rule.  The regulator defended its decision by noting that the programs operate no differently than programs run by the major wholesalers.  In recent years, the SEC has expressed concern that too much retail flow was not reaching the public markets;  rather it was being intercepted by wholesalers. The SEC noted the programs would be run as one-year pilots.  The New York Stock Exchange and NYSE MKT (formerly NYSE Amex) first proposed their programs last October.  The proposals drew opposition from both the buyside and sellside for a variety of reasons, but mainly because they would violate Rule 612 of Regulation NMS, or the  sub-penny quoting rule. Under the exchange’s programs, market makers will be allowed to post hidden quotes in sub-penny increments that may only be traded against by qualified retail brokers.  The plans’ detractors noted this was a violation of the SEC’s ban on sub-penny quotes, which the regulator has noted could discourage traders from posting limit orders. The NYSE Euronext exchanges requested exemptions from the rule and the SEC granted them.  In doing so, the SEC noted that limit order traders were unlikely to be harmed by the hidden sub-penny quotes because they were specifically earmarked for retail orders.  The SEC argued that limit order traders were unlikely to interact with retail flow anyway as very little reaches the public markets. Also problematic with the proposal was the New York’s method of alerting holders of retail orders to the availability of those sub-penny trades.  The exchange plans to send out semi-blind messages called "retail liquidity identifiers," or liquidity flags, to participants.  The messages divulge symbol and side, but not size or price.  The flags are similar to so-called "actionable indications of interest," which brokers have sent to their dark pool participants over the years. Actionable IOIs came under SEC scrutiny a few years ago because they seemed too much like quotes to the regulator.  Because they function like quotes, the SEC argued, the flags are subject to the regulator’s Quote Rule.  That means they must be published in the consolidated quote stream for all to see.  They cannot be shared with a select group of traders. NYSE argued the RLIs were not quotes.  But if the SEC insisted they were, the NYSE said, then the NYSE should receive "no-action relief" from the Quote Rule, as its program is beneficial to retail investors.  In approving the RLPs, the SEC agreed to provide the no-action relief, saying the flags “would increase the amount of pricing information available to the marketplace.” Industry and regulatory pressure earlier forced the NYSE exchanges to make one significant change to their proposals.  In February, they narrowed the definition of the retail orders they would accept under the program.  Despite a plan to market the program to wholesalers, the NYSE now will no longer accept their layoff, or principal, trades.  Now, under the program, it will only take retail orders handled on an agency basis. To continue reading, or for further details, go to:  [Traders Magazine, 7/5/12].