Are you ready for even more market complexity for our Rubik’s cube of a market?
On November 19th, Direct Edge will roll out a brand new order type – the NBBO Offset Peg Order. The SEC did not approve the order type as Direct Edge filed it as a Notice of Filing and Immediate Effectiveness of Proposed Rule Change. And from our note yesterday you know that back in February of this year we wrote:
If an Exchange decides to submit a rule change that is deemed “immediately effective”, then the SEC is going to have a much tougher time getting it disapproved. Prior to Section 916, the SEC could have stepped in within 60 days of the filing and forced the exchange to justify its changes. Now, the burden falls on the SEC. They can suspend the rule change but then must institute proceedings to approve or disapprove the rule. The SEC would have to make the case why the rule change does not meet code.
So – on November 19th be ready for a new order type called the NBBO Offset Peg Order.
What is the NBBO Offset Peg Order?
It is an order type that Direct Edge is creating with its ultra-high frequency trading market makers in mind. From their filing:
While the NBBO Offset Peg Order would be available for all Users, the Exchange believes it would be particularly useful for, and therefore used predominately, if not exclusively, by Members acting as Market Makers in accordance with applicable Exchange Rules.
The order type will allow users to price orders pegged a certain controlled percentage away from the NBBO. The order type will be displayed as well as non-routable. It is one-sided. It will help “market makers” enter quotes a designated % away from the NBBO automatically. It will help them manage Reg SHO requirements.
What are some potential issues with the NBBO Pegged Offset Order?
– Is this order type a way for HFT market makers to get around the Reg SHO short sale locate requirement? If they use this order type does that give an HFT firm an exception to the locate requirement? Is that “bona fide market maker” exception designed for these firms?
How can you use the NBBO Pegged Offset Order, if you were so inclined?
If you used this order type would you get an exception for the bona fide market maker Reg SHO locate exception? It is doubtful. You probably would not use this order type.
Is a new order type needed?
Good question. It is obviously being demanded by HFT market makers, and BATS and NASDAQ both have similar order types. And while all these exchanges have, or have had, automated two sided quoting mechanisms for HFT firms, they are switching to this new type of NBBO one-sided pegged order.
This order type on the surface appears to be a way of technically gaining an exception to satisfying a short sale locate requirement, without providing any meaningful benefit to the market place. This order type appears to be designed to satisfy a legal technical point – namely that while firms need to perform locate checks upon entry of short sale orders, an exception exists for “bona fide market makers”.
Does the SEC care that it keeps allowing for rules and complexity in our markets, specifically at the request of high frequency trading firms who do not have customers and serve the general public?
Who does the SEC think the markets are supposed to serve?
What will happen if another market making firm codes incorrectly for this complexity, as Knight did for the NYSE RLP program?