(Bloomberg News) Bats Global Markets Inc., the third-largest U.S. stock exchange operator, plans to create a program to draw orders from individuals to one of its two markets.

The company asked the Securities and Exchange Commission for permission to compete with the New York Stock Exchange's initiative to attract buy and sell requests from smaller investors by offering better prices than are available to other market participants. Nasdaq OMX Group Inc. and Direct Edge Holdings LLC have said they're also working on plans similar to NYSE's 12-month pilot program, which began on Aug. 1.

Exchanges are eyeing orders sent to so-called equity wholesalers, a category of market makers that executes orders for individuals supplied by brokers such as TD Ameritrade Holding Corp. and Charles Schwab Corp. Knight Capital Group Inc., Citadel LLC, UBS AG and Citigroup Inc. are the largest wholesalers trading orders away from exchanges at prices that match or improve on the levels offered publicly, a business known as internalization.

"This is a play for market share," Alison Crosthwait, former managing director for global trading strategy at broker Instinet Inc. in Toronto, said in a phone interview. "Exchanges are better regulated and have more transparency, but the difference is not huge. It's more about competition between exchanges and internalizers," she said.

Better Quotes

The SEC must approve yesterday's filing from Lenexa, Kansas-based Bats before its retail price improvement program can become effective. The initiative allows the exchange's member firms to supply quotes that are at least a tenth of 1 cent better than the best price at which other market participants can trade. The orders will not be displayed publicly, as is also the case at NYSE.

Daily U.S. equity volume averaged 6.66 billion this year, 15 percent less than the average from last year, according to data compiled by Bloomberg. That compares with 8.52 billion in 2010. On Aug. 13, volume of 4.5 billion shares reached the lowest level since at least 2008, excluding holidays.

"A significant percentage of the orders of individual investors are executed over-the-counter," Bats BYX Exchange said in its filing. About a third of U.S. equities volume takes place away from exchanges, including orders from retail clients that can be executed immediately, according to data compiled by Bats. "The exchange believes that it is appropriate to create a financial incentive to bring more retail flow to the public market," Bats said.

Orderly Markets

The Securities Industry and Financial Markets Association told the SEC in a March letter that "sub-penny increments would not contribute to the maintenance of orderly markets" and discrimination among users should be discussed more thoroughly before NYSE's program was implemented. It urged the SEC not to approve the project.

Bids and offers at increments of less than 1 cent currently aren't permitted by the SEC since the disadvantages are seen as outweighing the benefits of minimally better prices. The SEC exempted NYSE Euronext's retail programs for the New York Stock Exchange and NYSE MKT from the ban.

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