The rise of exchange-based dark pools continues

If you can't beat them, join them.

That seems to be the prevailing sentiment on the part of stock exchanges, as they ponder ways to win back market share from dark pools, especially those operating as internalizing engines for broker dealers.

Over the years, the exchanges, notably the NYSE and Nasdaq, have watched retail order flow to dark pools. To get back these orders, both are bent on incorporating dark pool concepts. The NYSE's Retail  Liquidity Program has generated lots of news, some of it controversial. And now Nasdaq has proposed a program for so-called Retail Member Organizations.

Nasdaq OMX disclosed in an SEC filing, as noted by Securities Technology Monitor, that it intends to stage a one-year pilot proposal that would create "a new class of market participant to steer additional retail order flow to its tent…. Retail Member Organizations (would be) permitted to 'provide potential price improvement for Retail Orders in the form of non-displayed interest that is priced more aggressively than the Protected National Best Bid or Offer.' The 'RPI interest' is defined as 'non-displayed liquidity on the Exchange that is priced more aggressively than the Protected NBBO by at least $0.001 and that is identified as an RPI Order.' "

Yet another order type!

Nasdaq said it "believes that the minimum price improvement available under the Program, which would amount to $0.50 on a 500-share order, would be meaningful to the small retail investor."

While exchanges would like to push to sub-penny increments to win this order flow, I've noted that the SEC is also pondering ways to widen price spreads when it comes to small-caps that have had trouble attracting liquidity. At this rate, the fragmentation problem looks no closer to being solved. Are we heading toward a formal divide between retail orders and institutional orders? Are we heading toward separate market structures for low-volume stocks and high-volume stocks?

As of now, it's all unclear. At some point, the need for a radically new market structure will become more acute. We may be there already. -Jim