Thread by @mittalbestex

R-NBBO (RETAIL NBBO)

A PFOF ban will be too politically charged and will not resolve the real issue. Here is an alternative market structure proposal.

Create a Retail NBBO instead.

1. Allow exchanges to create separate order books for retail flow. Each limit order books serves a segment :For example Robinhood/Schwab etc can be retail1, IBKR retail2 etc..

2. These categories only apply to firms sending Market Orders and Marketable Limit Orders. Exchanges to publish markouts at 1 sec,5 Sec, 30 Sec, 1 Min, ..5 Min for flows from each segment to encourage liq provision.

3. All institutions, Retail Brokers and market makers should be eligible to send limit orders to these order books. (Create competition for retail flow).

3 b. Crossed market should allowed in these order books (Many firms may send a limit order better than the mid price as long as they can trade with retail flow).

4. Tick size in these books should be in increments of $.0005 for stocks below $50, $.0010 for stocks $50-$100 and so on. Off exchange trade prices should also be consistent with these “retail” tick sizes. No change in regular Limit Order Book ticksizes required.

5. SIP publishes a R-NBBO (Retail NBBO). R-NBBO calculated as the INSIDE of both the regular NBBO and the NBBO of retail limit order books. Retail brokers eligible to trade on these order books MUST guarantee the R-NBBO.

6. Retail Brokers should still be able to send orders to off exchange venues/ MMs AS LONG AS they guarantee their clients the R-NBBO price. Similar to NBBO protection.

7. This model does not require:

#PFOF Ban

Tick Size changes in regular limit order books

and does not prevent off exchange venues from competing with exchanges

8. This will ensure that retail limit orders, institutional limit orders and MM limit orders can compete for retail market order flow on a level playing field.

11. An alternative model prevalent in most non US equity markets, where all the retail flow goes to exchanges, i.e. non segmented” model, is unlikely to get implemented in the US. Because it would require PFOF, TradeAt, Maker/Taker and tick sizes.

12. In the non segmented model, we estimate that NBBO spreads will go down by at least 25%. But that assumes all retail moves to exchanges and the current level of retail participation. bestexresearch.com/the-good-the-b…

13. The R-NBBO model as proposed here will have two spreads: an R-NBBO spread and an NBBO spread. R-NBBO spread is likely to be closer to ZERO on avg based on the current toxicity levels of Retail Flow. NBBO spreads will not change.

14. The current model is the worst of all three:
Retail price improvement tiny due to no order by order competition.
NBBO wide. Uneven playing field for exchange MMs and wholesalers. High information asymmetry. No interaction between investor limit and retail market orders.

15. A segmented model similar to the one proposed here encourages order by order competition and will be easier to implement. It creates two spreads but has even better implications for retail.

cc @ltabb @HideNotSlide @AlexanderGerko @FINRA @RobinhoodApp @GaryGensler @CGasparino @CharlesSchwab @Fidelity @matt_levine @aosipovich @SECGov @GaryGensler @Nasdaq @IEX @citsecurities @VirtuFinancial @FINRA @dlauer @Nasdaq @NYSE @BestExResearch