Has NYSE Just Won The Trading Venue Acronym Game?





We often are participants on Market Structure Conference Panels that discuss what seem to be persistent themes pervasive in modern equity market structure. These themes often discuss the tradeoffs between complexity/competition/innovation vs. simplicity/fairness/CLOB, the tradeoffs between lit vs. dark trading, and the balancing of short term trading needs with investor needs. Just yesterday at TD’s Market Structure Conference in Toronto, we participated on such a panel, and one question discussed the ICE/NYSE merger, and if ICE/NYSE would take a leadership position in the industry by swinging the pendulum back towards an acceptable middle ground more conducive to the needs of long term investors.


The timing of that discussion could not have been more prescient.


The New York Stock Exchange, fresh off a highly successful Twitter IPO, has just made a rule proposal for a new pilot program introducing two new order types – the Institutional Liquidity Order (ILO) and the Oversize Liquidity Order (OLO).


They just might have something here. While over the past decade the major stock exchange families have proven that they can innovate by catering to HFT clientele, and mimicking each other’s order types, this new NYSE proposal is remarkably fresh.


Let’s look at what NYSE has just proposed, and why they have proposed it.  We’ll start by answering why they have proposed the ILO-OLO pilot program first.


Citing Congress,


“The importance of competition among orders has long been recognized. Indeed, when Congress mandated the establishment of an NMS, it well stated this basic principle: ‘Investors must be assured that they are participants in a system which maximizes the opportunities for the most willing seller to meet the most willing buyer.’ To the extent that competition among orders is lessened, the quality of price discovery for all sizes of orders can be compromised.”


NYSE notes how most dark pools are really just internalization engines, where orders do not get broadly exposed in order to receive the best price. They note the following:


–          Over 70% of off-exchange fills are priced at the NBBO or within a tenth of a penny of the NBBO. Is this meaningful price improvement? Trade-At anyone?

–          The average dark pool execution has fallen from 400 to 200 shares in just four years.

–          The SEC has found that the five dark pools with average trades sizes of greater than 1,000 shares make up less than 3% of dark pool volumes.

–          Lit markets dominated by short term traders damages price discovery, and diverse lit market participation will improve price discovery.

–          Investors need a clean venue where they can also move blocks of stock with minimal impact, in a way that still interacts with public lit markets.



And so, NYSE has just proposed two new order types: Institutional Liquidity Order (ILO) and Oversize Liquidity Order (OLO). Some of their parameters are detailed here:


–          ILOs are hidden orders of 5,000 shares or more.

–          OLOs are orders of at least 500 shares that interact only with ILOs.

–          ILOs and OLOs are ranked not as Price Time priority, but rather as Price Size Time priority.

–          Exchange displayed interest takes priority over ILO – OLO orders.

–          ILOs and OLOs may not be entered in sub-penny increments.

–          ILOs and OLO’s may not be two sided.

–          ILOs can be either Type 1 (non-routable) or Type 2 (routable).

–          The existence of these orders will be disseminated on the NYSE’s prop feeds, as well as on the CQS, via a Liquidity Indicator (LI) that will not show side or size.

–          They are designed to weed out pinging and institutional order detection.



These order types are designed to trade larger amounts of stock, yet still be connected to the displayed markets.


What NYSE is proposing is in essence a new dark pool, which is connected to the lit public markets. The order types are designed to work such that they include displayed orders in the matching process, while still providing the means and incentive for larger orders to meet with minimal impact. While dark pools can, and some of the best ones actually do, provide opportunity to trade blocks of stocks with less impact, NYSE is proposing such a pool which will not detract from the public lit markets and price discovery process.


In addition, while most dark pools are opaque and non-transparent regarding how their matching engine logic and order types work, save for IEX as an example, NYSE’s proposed pool is transparent.


Institutions, your voices are being heard by a few trading venues, dark and lit, and you have an opportunity to be vocal, with your words and your order flow. You now have two recent options before you (one existing (IEX) and one proposed (ILO-OLO)), that demonstrate real innovation, as opposed to copy-cat also-ran choices.


While it can and is often argued that more complexity and order types are damaging to market structure, these two recent innovations by IEX and NYSE demonstrate the spirit of innovation and competition that the regulators at the SEC were actually hoping to stimulate over the past fifteen years.


Please make your thoughts on NYSE’s new pilot program heard to the good folks at Trading and Markets at the SEC. You can email them here:


tradingandmarkets@sec.gov and bermang@sec.gov