Are Our Markets Too Complex? You versus SEC


Late Friday, Reuters’ Herb Lash published an article surrounding the complexity of US equity order types – Complaints rise over complex U.S. stock orders. Give it a read! Some salient points:

–          Order types can reach an estimated 2,000 variations as a fully electronic market and more than 50 trading venues have multiplied the possibilities of how, when and with whom to trade. And they have changed how buying or selling interest in the market is detected.

–          Sal Arnuk’s quote: “My point is the exchanges are providing their largest customers by revenue and volume, guaranteed economics. If that’s not a red flag, I don’t know what is.”

–          Exchange officials deny they serve special interests, noting the Securities and Exchange Commission approves all new order types. 

–          Whistleblower Haim Bodek’s lawyer: “The only public comment we have is that we believe the evidence will show that the abusive properties of these order types were not disclosed by the exchanges and that financial institutions should be aware of these abuses.

–          SEC’s Greg Berman: “The statute doesn’t say, ‘We can’t have complexity in the marketplace. It doesn’t demand simplicity; it demands fairness, equitable treatment.”

–          Unnamed SEC source: “The most sophisticated exchange users go to great pains to figure order types out. Even if some may benefit certain participants more than others, I don’t know that there’s necessarily fire there.”

Are our equity markets too complex? We have thoughts so and have been very public in voicing our opinion in that regard for nearly five years. Numerous institutional investors have also expressed that viewpoint publicly, ranging from CEOs at Liquidnet and the New York Stock Exchange, to icons including Charlie Munger, Michael Price, Leon Cooperman, Mark Cuban, Julian Robertson, Lazlo Birinyi, and …yes… even high frequency traders like Manoj Narang.

And yet the SEC, despite failed IPOs, despite Flash Crashes, despite Algo’s Gone Wild, despite being privy to the works of Nanex, and despite information provided to them on how order types are abused – still claims that the markets are not too complex. Here is the SEC’s own Greg Berman and his thoughts on our market structure: Greg Berman’s View of our Market Structure.

And here are some other links we thought you would find useful in making your own determination regarding the complexity of our stock markets:

Regulation NMS -523 pages

SEC’s 50 Page FAQ section on Rule 611 and Rule 610 or Reg NMS

BATS Order Types and Routing Strategies

DirectEdge Order Types and Routing Strategies

NYSE/Arca Order Types and Routing Strategies

NASDAQ/OMX Order Types and Routing Strategies

What the SEC’s Website Lists as Types of Orders

SEC List of Dark Pools

SRO Rulemaking

Themis Trading’s US Market Structure Diagram: