Nasdaq follows NYSE in launching retail dark pool

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An oft-overlooked fact in the great dark pool debate is that both formal exchanges as well as big broker dealers offer trading in the dark.

The big brokerages are well known for their dark pools of various stripes. The exchanges are generally seen as the great counterweight of dark pools -- the avengers of light, so to speak.

But in reality, as order types have multiplied in recent years, the big exchanges also offer various forms of dark trading via specific order types. The lines between light and dark trading has been blurring even more recently, as traditional exchanges ramp up their efforts to offer more dark pool-like execution services aimed at retail investors in order to better compete with the internalization dark pools of wholesalers.

I raise this issue again in light of the news from Traders magazine that Nasdaq OMX has informed members that it will begin testing a Retail Price Improvement program soon.

"The program is set up to allow marketable orders from retail investors to interact with hidden orders from institutions, before going into public trading. The interaction will give institutions the chance to grab the orders by providing prices better than the best bid or offer available nationally, at increments of less than a penny a share," notes Traders.

The program is quite similar to NYSE Euronext's Retail Liquidity Program, which is already underway in tests. It's unclear how much order flow this will generate for either the NYSE or the Nasdaq. The idea of course is that the payment-for-order-flow features will prod more front-end brokerages to send trades their way. In the end, however, it may be that the wholesalers end up being the most active users of these programs.

All in all, you can't blame the traditional exchanges for fighting fire with fire.

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