The Cowardly Order Type: Route Peg


About six weeks ago, we have we had written about an exchange order type that tips the scales of fairness in favor of HFTs, who get to “add liquidity” and collect rebates with orders that won’t get executed if the contra-side is bigger in size than they are. We remarked about how insane it is for exchanges to design order types that are intended to be traded through. We remarked how it was insane to design an order type that allows one class of speedy hyper trader to get top of book standing (collect rebates), and yet skip out on the risk (i.e. – don’t trade against an order likely to make my order adversely selected upon).


Well, today we want to highlight another of these order types that the SEC just approved, and that goes live tomorrow, September 7th, 2012: Direct Edge, the stock exchange the introduced the flash order type to the equity markets, is introducing the Route Peg Order. You can read Direct Edge’s description of how the order works here. Essentially, this order type allows firms to enter orders on the Direct Edge exchanges that get rebates, that get standing in the queue, and that will not execute if the contra side routing through Direct Edge is larger in size.


On August 16th, 2012 the SEC published this notice, which extended the comment period for another 45 days, to October 3rd, so that it could weigh the effects of such an order. They had not received any comments on Direct Edge’s proposal and presumably wanted to encourage the industry to make its voice heard. Something happened at the SEC along the way, however, and just over one week later they decided to go ahead and approved Direct Edge’s Route Peg order, and not wait until October 3rd.


Amazingly, this order type is being spun as an “Anti-HFT” order type. Traders Magazine wrote this piece: Direct Edge Introduces Anti-HFT Order Type, and noted that according to the SEC filing Direct Edge claimed to the SEC that professional and high frequency traders were unlikely to use such orders. And the Traders Magazine “Anti-HFT” spin followed ironically the CNBC appearance of Direct Edge’s Bill O’Brien, where he stated that he doesn’t “even know what high frequency trading means”. You can’t make this stuff up.


Allow us to put to you that the ONLY type of traders who will use this order type are HFTs. It is an order type that pays a rebate. It “adds liquidity only”. The orders are likely to be very small orders. They will not execute if the contra side is bigger than they are, where they would lose money. Does that sound like an institutional order to you? Or does it sound like an HFT discriminatory order designed to collect exchange rebates with even less risk than their collocated speed and flashing allow?


Does this sound like a good development in our stock markets? Do you think these order types distort true supply – demand metrics? Do you think assets are more or less likely to be accurately priced (accurate price discovery) with these order types in the marketplace?


Friends, we not only have a fragmented equity market, with over 50 for-profit exchanges and dark pools, we now have stock exchanges further segmenting orders within their own exchanges – a whole new degree of fragmentation. The quality of our equity markets is quietly deteriorating with each passing day, and each SEC order-type rule approval.


While Direct Edge’s Route Peg Order goes live tomorrow, perhaps you may want to still make the SEC aware of what you think of this order type. “Send an e-mail to Please include File No. SR-EDGX-2012-25 on the subject line.”