Order Type Disclosure


We keep hearing that there needs to be more disclosure in the equity markets.  While we still haven’t seen much disclosure when it comes to order routing and dark pools (other than a few Form ATS reports), the exchanges have started to disclose more information about their inner workings.  In the past week, there have been two filings, one by Direct Edge and one by Nasdaq, which shed some light on their order types and the type of data that is used when processing orders.

Direct Edge filed a 114 page document with the SEC​ which seeks to clarify the exchanges order types and order instructions.  According to the filing:

The Exchange believes the proposed amendments will provide greater transparency regarding how the System operates the order types the Exchange offers, which instructions a User may attach to each order type, and how order types and instructions when used in combination, may affect an order’s execution priority under proposed renumbered Rule 11.9.”

Apparently, Direct Edge is trying to reduce the amount of order types they currently have by reclassifying some orders as instructions:

“In certain cases, what was previously described under the Exchange’s rules as a standalone order type, is, in fact, an instruction or set of instructions attached to an order type and not an order type itself.”

The document goes into great detail to describe how Direct Edge prices their orders and how different order instructions can modify an order type.  The document details order types including the now famous “Hide Not Slide Order” as well as pegged orders and short sale orders. While we have not thoroughly vetted this document, it is clear to us that it is a direct response to Haim Bodek’s complaints that he filed over two years ago. Haim was the first to criticize how certain order types, which were undocumented, were being used by certain investors to queue jump and disadvantage other investors.  Two years ago, we wrote this about Haim Bodek :

“In essence Haim is discussing that there were/are order types that were furnished to ultra-HFT players that gave them advantages getting to the top of limit order books at your expense. Haim has apparently gone to the SEC with this information some time in 2011, based on media reports. So, the SEC knows about this. Some exchanges have been quietly cleaning up their unfair loopholes over the past year, and some exchanges have been less diligent in doing so. We can only presume that this is because the SEC has begun investigating order types, based on what they learned from Haim.”

Two years later and Haim Bodek seems to have accomplished his goal: exchanges have finally started publishing operating manuals.  We intend to thoroughly read through this Direct Edge operating manual and highlight any interesting findings.

The other disclosure this week came from Nasdaq.  While their filing wasn’t nearly as long or as interesting as the Direct Edge filing, Nasdaq did file a disclosure​ about which types of data they use to price their merchandise.  They do use direct feeds from all exchanges that supply a direct feed (the only four that do not supply a direct feed are NYSE MKT, FINRA ADF, CSX and CBOE).  For these four exchanges, Nasdaq relies on the SIP for their data.

Nasdaq states in their filing that they disclosed this information as a direct response to a June 20, 2014 letter written by Steve Luparello, the SEC Director of the Division of Trading and Markets. Luparello requested from all exchanges clarity on whether or not the exchanges are using direct feeds or the SIP when pricing and routing orders.  We expect that the other exchanges will be filing their pricing and routing disclosures soon and we look forward to seeing their details.