Nasdaq and the SEC Respond to Our Comment Letter


The SEC has decided to approve Nasdaq’s rule change for how they treat post-only orders.  Before we talk about why they approved this proposal, we wanted to highlight Nasdaq’s response to our comment letter on this proposal (Themis’ letter was the only comment letter that the SEC received).

If you recall, Nasdaq had proposed that post-only orders that interact with non-displayed liquidity should no longer be price slid but instead should be allowed to post at the locking price of the non-displayed order.  In their original proposal, Nasdaq stated that the price sliding behavior that has existed for the past seven years was actually leaking information:

“In addition, the member entering the Post Only Order learns through the repricing action both that there is a Non-Display Order resting on the book and also the price at which the Non-Display Order is resting. The Exchange believes that this interaction is inefficient and detrimental to investors, to members, and to the market.”

We wrote a comment letter on this proposal because we wanted to highlight the fact that Nasdaq’s treatment of the SEC approved post-only orders was actually leaking information and harming investors.  We commented that rather than allowing Nasdaq to just change this behavior, we thought that the SEC should outright ban all post-only orders.

Nasdaq’s Response to Themis Letter

“Nasdaq applauds Themis’ commitment to the notice-and-comment process, believing that such comments generally enhance the Commission’s review of impactful proposals. Nasdaq also appreciates Themis’ view that price sliding Post Only Orders to avoid locking and crossing the market is sub-optimal. Nonetheless, Nasdaq respectfully submits that Themis’ recommendation to disapprove the Proposal is a misdirected attempt to reverse the seven-year history of Post Only Orders.”

Nasdaq is correct.  Our letter was a direct attempt to encourage the SEC to take a look at the post-only order type.  Nasdaq allowed their customers to use this order type for seven years which assisted them in identifying hidden order flow.  Rather than explain why they allowed this leakage to occur, Nasdaq’s letter simply is saying that their new post-only proposal will improve execution quality.  If forced to choose between the two methods, we would agree that the proposed locking method is better than price sliding but that would be missing the point of our comment letter.

Nasdaq also states:

“Nasdaq believes that allowing buyers and sellers to reflect their true demand and supply prices, as opposed to re-pricing to an artificial price, enhances retail and institutional investors’ experience on Nasdaq. Nasdaq also believes that retail and institutional investors will benefit greatly by the reduction of information leakage that will result from the Proposal.”

We find it curious that it took Nasdaq seven years to finally figure out that post-only orders were leaking information on hidden liquidity.

SEC Approval of Nasdaq Proposal

While we expected a response from Nasdaq similar to their letter, we also expected that the SEC would have a tough time responding to our letter.  After all, the SEC was the agency that approved the post-only order type and they are ultimately responsible for the information leakage that has been occurring. In their approval of Nasdaq’s post-only order repricing behavior, the SEC notes Nasdaq’s responses to our questions about price discovery and the allowance of locked markets.  But nowhere in their approval do they address the information leakage problem that has been occurring over the past seven years.  

We are disappointed in the SEC, not for their approval of this order modification, but for allowing Nasdaq to leak information on hidden order flow and then not even addressing the issue.  We think that along with their approval, the Commission should have also issued a statement noting the problem that has occurred for the past seven years and then stating that they would be broadly reviewing how all orders interact with hidden liquidity.

Without this broad review, how can investors feel confident that other exchanges are not leaking information?