Exchange to retail: it's safe again
Some exchanges, like NYSE, have suffered from toxic liquidity because the uninformed orders that everyone is looking to trade against, have been removed by the time they get there.
NYSE's retail liquidity program is looking to bring back some price competition for uninformed (retail) orders, and thereby encourage uninformed liquidity back. Is it any wonder - they have already lost all the retail order flow, so now they have nothing to lose.
The ASX is a good example of an execution venue that provides and has always provided good equal access - eg. non-market-makers are not prevented from providing quotes to the orders book. The Australian retail brokers don't sell their order flow to other firms. So the ASX is one place where you do get a healthy mix of liquidity: informed and uninformed alike. Going forward, however, I see an issue as dark pools try to take liquidity away providing the uninformed investor with the promise of protection against information leakage and some HFT techniques such as latency arbitrage.
Australia is at a critical juncture. One path leads to "choice", complexity, non-transparency and market fragmentation - requiring the help of HFT to smooth the prices via arbitrage (at a cost). The other leads to maintaining liquid, transparent public order book market that has a healthy mix of investor types dealing with one another. As traders consider the impact of ever increasing technology 'arms race', they are encouraged to choose: better to hide or safety in numbers?
My hope is that we can reforming the public order book such that uninformed investors are looked after, without having to resort to liquidity fragmentation in order to pursue price improvement.
