November 27, 2011
After reading an article on Reuters about the New York Stock Exchange's proposal to attract more trades placed by retail investors by offering a fraction of a penny better prices, I felt compelled to write to the SEC. The NYSE's intent is to recapture market share and enhance revenue not protect the retail trader.
The article also states that many retail trades are now placed through wholesalers. This venue allows wholesale market makers to "get a first look a retail orders and the opportunity to use that information to aid their own trading strategies." In fact many if not most retail investors do not even know their trades are not being executed on the NYSE nor have they consented to have any information about their trades shared with outside parties.
For the past several years the retail investor who is purchasing stocks and bonds for his/her own account has been at the mercy of institutional traders and program traders. Prices can rise or fall precipitously because a large trade is occurring at the same moment a retail investor trying to purchase 100, 500 or 1,000 shares of a stock. Volatility is lethal for the retail investor yet the very life blood of program traders and some institutional traders. The retail investor is at the mercy of the institutional trader and their huge orders for 50,000 to 1,000,000+ shares of a stock.
It has occured to me that a far more equitable way to regulate stock trading would be to divide the markets according to the size of the trade. As an example, have trades of 100 to 49,999 shares occur on one exchange or division of the NYSE. Institutional trades of over say 50,000 shares occur on another division. Program trading of over 50,000 shares can occur on yet another division of the NYSE. Let those with computer generated trades hoping to benefit financially by capturing split second variances in pricing have their own battlefield and play with their own kind.
At the end of the day, the closing prices from all 3 divisions can be reconciled and the average calculated to determine the opening price for say IBM or GE on the next day. If there is too great a disparity between the closing price of IBM on each of the 3 divisions of the NYSE, no reconciliation occurs and each division uses their own closing price for the next day. This of course would be a concern to the corporation's shareholders but may also have the effect of an institutional trader being willing to place trades in smaller increments (10,000 shares instead of 1,000,000)
Ultimately this probably would: 1)slow down trading (also reduce revenues to the NYSE)or 2)improve efficiency
and volume for all three divisions, or 3) Surely someone would try to arbitrage the pricing of a stock on the three different divisions but this could be monitored by simultaneously watching who is placing trades on the three different division. The advantage would be that any investor, retail or institutional would know at what division of the NYSE his trade would take place and the size of the trades allowed in that division.
The SEC has reponsibility to protect all investors. It should consider ways to minimize risk to the retail investor who, as we have seen in the past few years, has been defenseless against institutional traders.