NASDAQ finally removes hidden data information

Five months after our “Data Theft on Wall Street” paper, NASDAQ has finally capitulated and will remove the order id numbers which were revealing information on hidden orders.  And to Nasdaq we say, “What took you so long?”

DJ Nasdaq Will Remove Hidden Order Data To Assuage Worries

NEW YORK (Dow Jones)–Nasdaq OMX Group Inc. (NDAQ), operator of the Nasdaq stock exchange, said this week it will strip information from stock orders that some traders say is too revealing.

Starting Dec. 6, Nasdaq will hide reference numbers assigned to orders meant to be invisible to the market, the exchange said Thursday in an alert to traders. Some traders were concerned that sophisticated computer programs could use those reference numbers to identify a larger pattern in orders and use that to manipulate prices.

While Nasdaq said the reference numbers could not be used by anyone trying to game the system, the exchange will replace them with zeros to ease any lingering worries. Other exchange operators, including BATS Global Markets, tweaked their systems earlier this year to randomize order numbers.

“Due to client demand, we ended up making the change,” said Brian Hyndman, Nasdaq’s senior vice president of transaction services.

Information linked to supposedly hidden orders became a flash point earlier this year, after some investors voiced concerns that sophisticated traders armed with superfast computers could be using identification numbers to manipulate prices.

Hidden orders are often used by institutions hoping to execute a large order without disrupting the market. A trader placing a large order may break it up into smaller pieces, with only one order active at a time. For instance, someone hoping to sell 500 shares of a stock may sell only 100 shares at a time, with each new order kicking in after the previous 100 shares have been sold. In such a reserve order, most of the trade is meant to be invisible. Prior to this week’s change, Nasdaq already used a unique number for each order to prevent linked orders from being detected.

Still, some worried that the information tags applied to these orders could be used by firms to help piece together which are part of a larger trade and use that information to drive up prices or otherwise manipulate the market. In late May, exchange operator BATS Global Markets modified the way it identified order information to allow customers to choose whether they would like their market order identification number randomized in the data that hits the tape after the trade is executed.

-By Kristina Peterson, Dow Jones Newswires; 212-416-2917; kristina.peterson@dowjones.com

http://online.wsj.com/article/BT-CO-20101008-709686.html