Order Type Madness Part CXXIII – Thanks Bloomberg!




Exchange order types. The Wall Street Journal wrote about them two years ago (For Superfast Stock Traders, a Way to Jump Ahead in Line). We have spoken about them for years, and especially in our book Broken Markets. Of course we also spoke about them on many industry panels and in our morning notes to you. All in, we have several dozen morning notes to you all that discuss stock exchange complex order types. From memory lane:

In this post, Cutting the Line and Order Types, we wrote to you about the ARCA PL Select order type.

In this post, Even the Stock Exchanges Are Confused About Their Own Order Types, we wrote again about the PL Select order, and how it also leaked information.

In this post, Are Our Markets Too Complex – You vs. SEC,  we also wrote about the discriminatory nature of these order types, and unintended usage.

In this post, Fred and Ethel Called and Wanted to Know about Intermarket Sweep Orders, we wrote to you about the perversion of ISOs by HFT firms and stock exchanges.

Modern Markets Initiative, the HFT Lobbying group funded by several HFT firms (including the often-fined Tower Research) has recently also recently written about complex order types. In this propaganda note titled Embracing Simplicity, they lament the complexity of markets, and claim that the complex order types that they have created with the stock exchanges are just their way of trying to deal with Reg NMS locked markets prohibition. The irony of complexity-creators crying about complexity is rich indeed.

The great news is that all of us have some pretty good company lamenting the wrong-headed stock exchange order types. Bloomberg Tradebook has just commented to the SEC regarding NYSE’s proposal to Make the Add Liquidity Only Modifier Available for Additional Limit Orders and Make the Day Time-in-Force Condition Available for Intermarket Sweep Orders. Sadly the rule proposal from NYSE has not matched their recent talk about simplifying order types, and doing away with rebates. Read Bloomberg’s comment letter here; it is excellent. And feel free to also read Haim Bodek’s comment letter on the same NYSE rule as well.

Bloomberg states that NYSE currently correctly interprets the SECs Reg NMS, and that ISOs are meant to be used with an immediate-or-cancel time in force. ISOs are supposed to be aggressive sweeping orders that trade through a quote with the understanding that the order sender will also route to all other market centers to clear their quotes.

Bloomberg writes:

The ISO was originally introduced as a solution to data latency issues and prevention of an “indefinite loop scenario” that such issues could cause. In every instance in the Regulation NMS adopting release (“Adopting Release”), the Commission clearly referred to an ISO as an aggressive order- created for efficient sweeping.


 What Commission staff did not contemplate was the further corruption of the ISO order type into the Exchange’s requested Day ISO ALO order type- an ISO that is no longer an aggressive order and that no longer sweeps.

 Bloomberg also notes:

The Commission specifically stated the following in the Adopting Release about locked and crossed quotations: “The basic principle underlying the NMS is to promote fair competition among markets, but within a system that also promotes interaction between all of the buyers and sellers in a particular NMS stock. Allowing … locking and crossing quotations is inconsistent with this principle.”

 Bloomberg also makes an excellent argument for elevating the protection of reserve orders. If the goal is to encourage public liquidity and public order books, and if reserve book orders help dampen abrupt price moves, then why doesn’t the SEC protect reserve book orders? Bloomberg notes that stock exchanges ever auto-replenish reserve book orders without regard for locking markets. How can an exchange treat reserve replenishment this way on one hand, and then take the opposite reasoning with how they all want to treat Day ISO ALO orders?

Under current regulations, the replenishment from Reserve from an order that executed versus display technically never leaves the quote. It is treated as a quote update. In fact, most exchanges automatically replenish the display without checking whether they will lock or cross other protected quotes. The exchanges stand their ground with Reserve replenishment because the replenishment is instantaneous. Isn’t it ironic that the same exchanges that permit Day ISOs and the equivalent of a Day ISO ALO treat Reserve replenishment in this manner? By behaving this way and knowing that other SROs behave similarly, they cannot be in conformance with the “reasonableness” standards of Rule 610.

Bravo Bloomberg. We hope the SEC listens to your plea and does not approve NYSE’s attempt to adopt Post Only Day ISOs. We also hope they take NYSE’s proposed rule filing as an opportunity to force all market centers to abdicate their versions of the Post Only Day ISO.

This is a tremendous opportunity for the SEC to get on the right side of this debate, and to guide markets back towards how the SEC even intended for them to operate. It is time for Trading and Markets to find their back bone.

If you agree, please contact them and tell them you agree with Bloomberg Tradebook, Themis Trading, and so many others. You may call 202-551-5777 or send an email to tradingandmarkets@sec.gov