Themis Calls For SEC Moratorium on Approving Exchange Order Types


Themis Trading Calls For SEC Moratorium on Any New Order Types, and an Exhaustive and Expedient Review of Existing Order Types in All Equity Execution Venues

Themis Trading has highlighted numerous market structure fairness issues over the past several years, including improper data feed leakage, dubious arbitrages, as well as improper order types that favor once class of participant at the expense of others. Themis has taken great pains to educate market participants, industry regulators, and the general public with the goal of reigning in market abuses that have adversely impacted investors, as well as the public’s confidence in our capital markets. Their efforts have included white papers, blog posts, regulator presentations, regulator roundtables, industry conference panels, media appearances, and a book, Broken Markets, which was released earlier this year.

Today Themis highlights the process for regulatory approval of SRO rulemaking, specifically as it pertains to the plethora of complex, vague, abusive, and distortive order types proposed by US stock exchanges. They call for the SEC to cease approval for any new exchange order type, and to immediately and comprehensively review all existing order types, with the investing public’s interest as a yardstick.

“Our stock market was once the world’s envy. Today it is a fragmented web of chaos dominated by a game of high frequency trading rebate-maximization, which has nothing to do with equity valuations. The top industry players persistently push the exchanges they hold hostage to deliver new ways to get ‘an edge’ over traditional investors – including ways for risk-free arbitrage at the expense of investors.”

They continue, “The stock exchanges, representing their largest HFT customers and revenue source, have persistently bombarded the SEC with a host of damaging order types for approval. Each exchange has created complex price-sliding orders that on the surface exist to prevent locked markets. However, rather than just requiring that orders that would lock markets and violate Reg NMS to route out and transact, the exchanges have created ways for their largest HFT customers to game the maker taker pricing model – to add liquidity and collect a rebate. Many of these order types have the additional effect of distorting price time priority in our markets.”

Themis believes that some of these exchange order types allow their largest customers to “cut the line” in front of traditional investor orders, and that all of them pervert the simple process of matching buy and sell orders to trade. They name:

–          Display Price Slide

–          Price to Comply

–          Hide Not Slide

–          PNP Blind

–          PL Select

–          Multiple Display Price Sliding


They also contend that there are hundreds more, including order types the SEC has perhaps approved singly, not realizing that their danger lies in their combination, in effect creating new order types. They also question how many undocumented order types exist at the for-profit stock exchanges. And Themis believes these order types unfairly benefit a class of high frequency traders known to the industry as market makers.

“Our markets are dominated not only by high frequency trading, but by a specific subset of HFT the industry calls market making, whose activities resemble nothing of the sort. Each time an HFT defenders claim that they add liquidity that the market needs to transact, we can’t help but be outraged. To understand how these modern market makers work, one only needs to know that they use perks sold to them by the exchanges – including colocation, data feeds, and dubious order types – to make sure that they maximize the number of free shots at a risk free rebate. This means they want to bid and be first in line, and only when they are assured that there are other buyers deep behind them, and collect rebates. If they are successful and buy stock and collect a rebate, they can turn around and instantly sell that stock at the same price to the person behind them, still making a profit. This is not liquidity provision. They game ways to be at the top of the book in stocks that already have the liquidity that serves as a backstop.”

Given that the SEC has approved all of these order types, and that their value to investors and the public is at a minimum in doubt, Themis wants the SEC to disclose its yardstick and methodology for approving these complex order types, and to reexamine the exchange SRO rulemaking process in general. They propose a new SRO rulemaking process.

“The time has come for an overhaul. The SEC, after overturning the approval of most if not all of these order types, needs to create a new approval process. We advocate for the creation of a seven person panel that includes three SEC personnel, a broker-dealer representative, a stock exchange representative, an HFT representative, and an investor representative. This panel’s makeup should change every two years, and any new SRO proposal must be brought before this panel and voted upon.”

Themis makes clear that they do believe that investors will once again have confidence in our equity markets. However they insist this will only come about if and when our regulators realign the stock market’s plumbing and complex rules with the needs of investors – the owners of the market, and not high speed traders – the renters of the market.