Over the last several years we have written a great deal about how stock exchanges cater to their largest volume HFT market maker clients in numerous ways, at the expense of traditional investors. Over the last year specifically we have in particular been highlighting to you how certain order types by different exchanges have disadvantaged you. In addition, Scott Patterson’s book Dark Pools and his Dark Markets WSJ series of articles have also done a great job of highlighting many exchange order type abuses (think Haim Bodek) in the second half of 2012.
From all of our collective research we are together in a place where we know that different stock exchanges deal with different order types uniquely – some exchanges better than others. We also know that over the past year some of the stock exchanges have been making SRO rule filings that have amended their order matching engine logic for the better (i.e. more fair).
Enter NASDAQ. They have just produced a twenty eight minute slide presentation on order types that is imperative that you watch. In it you will learn about their treatment of:
- Price to Comply
- Price to Display
- Post-only orders
- Midpoint-post only orders
- NASDAQ routing strategies for routable orders
The presentation is a well-made easy-to-understand documentation which will make you come away with a real decent understanding of how order flow is treated in NASDAQ. Every other exchange should flow in NASDAQ’s example, and produce a similar tool for all market participants. We think the SEC would actually do the public a service by mandating such disclosure!
On some stock exchanges, the way they treat price-sliding, combined with some other order types they provide, has provided high speed firms mechanisms to distort price time priority and queue jump – all in the name of maximizing rebates. The way such exchanges have accomplished that bit of unfairness was at best not widely disseminated, and at worst undocumented.
NASDAQ has taken a leadership role with this presentation, and should be commended. They have demonstrated to all of us that currently they do not allow the queue-jumping asymmetries that exist on some other stock exchanges. Please watch the presentation, and demand similar ones from NYSE/ARCA, BATS, and Direct Edge. Perhaps even consider telling your broker to make sure their routing rewards fair exchanges, and outright avoids those that are not fair.