NYSE Euronext is making another big play for more retail order flow, offering up some interesting twists with plenty of room for debate.

The exchange seems bent on fighting fire with fire. In October, it filed a proposal that calls for the NYSE and the NYSE Amex to start paying for order flow from retail-oriented brokerages, a group it calls Retail Member Organizations (RMOs), along the same lines that wholesalers pay for such flow. The exchanges will charge a group of newly designated Retail Liquidity Providers (RLPs), which will be able to offset those charges via enhanced volume. They will be able to quote prices at sub-penny increments--one-tenth of a cent to be more specific. When the RLPs and others offer price improvement, it will be flagged in the public feed.

The RLPs will be designated from the ranks of designated market makers and supplemental liquidity providers. However, any member can contribute liquidity. The RLPs will have additional burdens in terms of providing price improvement. In exchange, they'll receive certain benefits.

The idea of sub-penny pricing is a major change for the exchanges, and possibly a huge benefit to retail customers. For that reason, the idea is attracting lots of attention.

The Nasdaq will likely propose similar pricing rules to attract retail order flow. To a certain extent, this has already been experimented with by companies like BATS and Direct Edge, to somewhat less than spectacular results. The point here is to attract the retail order flow that over the years has been lost to wholesalers like Knight Capital and Citadel and big brokerages that internalize orders. The main exchanges have long been plotting about how to get this order flow back. The wholesalers will likely be forced to respond in some form or fashion.

There are several issues that will be flagged in the public comment period, no doubt. For one thing, the pricing strikes many as discriminatory as only retail orders would benefits from the sub-penny pricing. Institutional orders would still be bound by penny increments. The other issue is transparency. The program would rely on hidden quotes, not publically displayed quotes, which some will find objectionable.

The big question is will this work? Will it redirect a lot of order flow to the exchanges?

One would think that the mainstream brokerages would shift order to flow to the execution venue that will pay them the most. But at the same time, it may end up being the wholesalers that end up sending orders to the exchange. You get the feeling that the some changes will likely be approved to boost competition for retail orders in the name of giving ordinary investors a break. The devil will be in the details, as always. -Jim