The NYSE Invisible Order That Ain’t Invisible!


It’s been a while since we did an order-type note, so we are due!

In Adam Sandler’s cinematic masterpiece Big Daddy, Cole Sprouse is the young actor who plays the role of Julian “Frankenstein” McGrath. Of course you remember this character; Julian is the little boy living with Adam Sandler, who learns how to trip skaters in Central Park, as well as overcome fear in general. How does Julian do that? He uses special glasses that Sonny (Adam Sandler) gave him that makes him “invisible.”

Of course Julian is not really invisible when he wears those glasses, just as an institutional hidden order is not really invisible on the NYSE.

(Wait what? What did you just say, Themis?)

Yes, that’s right. While we have written to you in the past about hidden orders that are often not really hidden, and how reserve book executions often get tied back to a parent order ID, visible on direct feeds (still the case on ARCA), today we point out a more recent example.

NYSE has been offering a way for some of your orders to be visible to savvy traders, even though NYSE advertised them as hidden. They have been doing this since 2008, under their Rule 13.

How NYSE Pegged Orders Work

Under the current Rule 13 NYSE allows pegged orders based on a PBBO (protected best bid and offer). For example, in a stock that was $20.00 bid and $20.05 offered, a pegged buy order would peg to the “best-priced available interest”. For a buy order, a reasonable person or exchange member would assume that a pegged buy order would display at $20.00. Prior to 2008 this actually is how pegged orders worked on NYSE. Fast-forward to 2008; NYSE introduced its Non-Displayed Reserve Order (think hidden).  NYSE’s pegged order was reading that hidden order as “best available interest”, and pegging to it, instead of pegging to the “best available displayed interest”.

An investor or trader (let’s call them Trader1) could therefore place a midpoint hidden order, or even a hidden order with a limit inside the PBBO. Perhaps your institutional VWAP or Target-The-Close algo would be such a trader, and perhaps it might enter such a hidden limit order to buy stock at $20.02.

Now, imagine Trader2, a savvy short term trader, who understood that NYSE’s pegged orders were pegging to hidden order flow. Trader2 could enter a pegged buy order, and on its direct feed see that its own pegged buy order was pegged to buy interest that was different than the displayed buy interest. Trader2, upon then learning that there was hidden buy interest in between the spread – and likely institutional buy interest, might take the offer ahead of that interest, and move the stock higher.

How an Institutional Trader Might be Harmed

 It is estimated that as much as half the institutional algos in the marketplace every day are VWAP algos. They execute typically using limit orders and midpoint hidden orders in dark pools and exchanges (like NYSE) throughout the day. These algos become particularly active at the end of the day, when more volume takes place.

Imagine that savvy traders (like Trader2) can continually enter and cancel pegged orders on NYSE, and see whether their own pegged orders were pegging to interest that was hidden – pre trade. Imagine that when they find such interest they can buy stock ahead of the interest, and sell it back to them over and over again – Wash-Rinse-Repeat.

Or, put simply in NYSE’s own words:

 The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange asserts that such a waiver is consistent with the protection of investors and the public interest because it would permit the Exchange to implement the proposed change as soon as the technology supporting the change is available, because it would respond to the Commission concerns that the current rule could potentially allow the user of pegging interest to ascertain the presence of hidden liquidity, and because it would provide transparency regarding the pegging functionality.


NYSE is Correcting the “Loophole” Very Soon

 With the above linked SRO filing, NYSE is seeking to correct this behavior. They are doing this now because the SEC has been on a mission since mid-2014 to force stock exchanges to disclose such loopholes, and fix them (you may recall that recently BATS filed to disclose correct some functionality that allowed for queue-jumping).


Every month or so, an article comes out, or an industry research piece that proclaims that HFT is shrinking. HFT certainly is less today than it was in 2008-2011. Ever-higher technology costs are partially responsible for their declining volumes. Declining institutional volumes are also partially responsible. However, perhaps the largest reason HFT has been on the fade, and particularly “bad HFT”, is the closing of loopholes – beginning with NASDAQ’s August 2012 Rule filing. This NYSE disclosure is just the latest in a series of disclosures, over the past year particularly, and market quality is improving as a result.

The next time you are at a market structure conference, and panelists talk about HFT being a much smaller deal than is hyped in the media, and that markets are robust, be sure to remind them that they have been fading mostly due to long-overdue corrections of loopholes and bad practices by the stock exchanges that enabled them.

Institutional investors need tools that allow them to cloak large buy and sell interests, particularly in a world dominated by high-speed short term traders. It is great that the exchanges provide such orders to aid them. However it is unconscionable to provide them such orders on one hand – order that give them a false sense of security, and then provide back doors for savvy traders to uncloak them on the other.

While invisibility glasses work out well for Julian in Big Daddy, Julian did not have to live life every day in the midst of high-speed predatory trading.



After having the pleasure of speaking to a few large market making firms, and as we are comfortable that such firms are not the kinds of firms that would engage in this sort of predatory trading behavior, we wanted to amend this note to state: IMC’s Remco Lenterman has publicly acknowledged that firms like his do not see (from the direct feeds) the price of a hidden order pre-trade; we believe him. Firms that make markets in thousands of securities are not in the marketplace to prey on loopholes; they are evolved market makers – and certainly an important value-adding participant in today’s markets.


We received an educational email from Dermott Clancy, a leading institutional NYSE floor broker for 21 years. He wanted to add to the discussion surrounding the NYSE D-peg order type, and we are happy to share his perspective and knowledge. He also corrects the way our understanding works. Specifically, these order types help ascertain hidden interest outside the quote, and not within:


Dear Sal and Joe,

 I thought the piece you did about the pegging order was great. There is just one thing that I would like to point out that this order type would not have pegged to dark interests inside the quote. However, it does peg to lit interests inside the quote which I understand was very rarely used for execution based upon the amount of shares executed by this order type.

 It pegs to both lit and dark interest outside the quote. Obviously, this is a very damaging tool to the investor.

 This order type pegs to dark interests entered by  floor brokers and upstairs brokers which enter orders on the NYSE. 

A high frequency firm can identify the dark interest outside the quote without even having to transact. Also very alarming is that most high frequency traders argue that all tools and order types are available to everyone.  In this instance, this order type is not available to a sell side trader and/or buyside trader because we would not be able to enter an order on the other side of the market of our order to search potentially for liquidity even if  we wanted to.

 Another problem with this order type is that customers are entering their order under the assumption the order is dark. Unfortunately, the pegging order ultimately acts like a flashlight to expose the customer’s order’s existence to the high frequency trader.


Thanks again. Nice speaking with you.

Let me know if there is anything I could do to help.