We already see a LOT of auctions running in the options markets, and trading these auctions it is one of the profit centers of market makers. It turns out that speed is still a factor in a stock market auction, and you can still have designated market makers that are guaranteed to get a cut of each auction.
I'm not sold that this move will actually result in much better prices for customers on average, but it will certainly "spread the wealth around" by allowing all brokerages to take advantage of a uniform price-improvement structure rather than negotiating individually with Citadel/Virtu. I have been an IBKR customer for a while, and I'll be happy because I don't get a lot of price improvement under the current system. Schwab customers, who get a lot of price improvement, may be less happy.
In options, there is the suspicion that the presence of a lot of auctions probably results in wider spreads, which we could see as auctions make it to the stock market, too. If all retail order flow goes into the market through special channels, the only trading remaining in the "normal" system will be from sophisticated traders, who you don't really want to trade against.
Of course, the SEC may then say "the experiment was a great success, retail traders are getting HUGE price improvement," ignoring that retail traders may be getting worse prices than the old NBBO from the widening of the spread.
> We already see a LOT of auctions running in the options markets, and trading these auctions it is one of the profit centers of market makers. It turns out that speed is still a factor in a stock market auction, and you can still have designated market makers that are guaranteed to get a cut of each auction.
The complexity and fragmentation as well - you can preferentially do auctions at venues you have an advantage on, and bully the venues away from fixing whatever you exploit by threatening to take away flow.
> In options, there is the suspicion that the presence of a lot of auctions probably results in wider spreads, which we could see as auctions make it to the stock market, too. If all retail order flow goes into the market through special channels, the only trading remaining in the "normal" system will be from sophisticated traders, who you don't really want to trade against.
Effectively all retail flow already goes through even more cutoff special channels? But I agree with the point, this seems like adding a tremendously complex game instead of just shrinking tick sizes. At least in options, you tend to have much wider spreads. But the fact that plenty of stocks trade at min tick is a sign the spreads could naturally be tighter.
> Effectively all retail flow already goes through even more cutoff special channels? But I agree with the point, this seems like adding a tremendously complex game instead of just shrinking tick sizes. At least in options, you tend to have much wider spreads. But the fact that plenty of stocks trade at min tick is a sign the spreads could naturally be tighter.
This is true, except the key factor is that the price signal eventually reaches the "normal" market when you look at the trading patterns of the wholesalers, mixing it in with the price signals coming from the trades that the wholesaler does for other clients (including their own strategies).
Moving to an entirely separate public information channel means that 100% of the trading activity on the markets (aside from the separate channel) is driven by sophisticated parties. That makes a big difference - for example, during the GME fiasco, there was uncertainty about how much of the activity was retail vs institutional traffic. After the proposed rule, we will know exactly how much of that flow is retail.
Don't forget that companies easily get around this by having higher brokerage fees when the brokerage arm and market making arm have the same beneficial owners. Just do what Susquehanna does: instead of filling an order 0.05 too high, fill it at a fair value, and charge a 0.05 fee. Then no other auction participants can better the fill, since all of the money got shifted from a bad fill to a high fee.
I'm not sold that this move will actually result in much better prices for customers on average, but it will certainly "spread the wealth around" by allowing all brokerages to take advantage of a uniform price-improvement structure rather than negotiating individually with Citadel/Virtu. I have been an IBKR customer for a while, and I'll be happy because I don't get a lot of price improvement under the current system. Schwab customers, who get a lot of price improvement, may be less happy.
In options, there is the suspicion that the presence of a lot of auctions probably results in wider spreads, which we could see as auctions make it to the stock market, too. If all retail order flow goes into the market through special channels, the only trading remaining in the "normal" system will be from sophisticated traders, who you don't really want to trade against.
Of course, the SEC may then say "the experiment was a great success, retail traders are getting HUGE price improvement," ignoring that retail traders may be getting worse prices than the old NBBO from the widening of the spread.