The Saga of the EDGX Retail Priority Order
We recently filed a comment letter with the SEC concerning a Cboe EDGX proposal which aimed to add a new Retail Priority Order . Our main concern with this order type was the information leakage that would occur on the exchange proprietary data feeds since the retail priority orders would be designated with a special identifier.
In addition to our letter, the SEC also received letters from an institutional investor, a market maker and a stock exchange who also expressed their concerns about this proposal. After receiving these comments, the SEC decided to institute proceedings to determine whether to approve or disapprove the proposal.
Three months after their initial proposal, the Cboe issued an amendment to their original proposal which refined their definition of a retail order and changed the requirement that retail brokers would have to mark ALL of their orders as retail priority orders.
Finally, on August 19, 2019, the Cboe filed a letter with SEC to try and convince them that they were not leaking information and that the commenters had it all wrong:
“The Exchange disagrees with the commenters. As explained in detail in the Amendment, the purpose of requiring attribution of priority eligible orders is, first and foremost, to ensure that market participants can continue to ascertain their own priority on the order book. As a result, with the changes to limit priority to a subset of Retail Orders i.e.,Retail Priority Orders, the Exchange would only require attribution of orders entered with the priority attribute. This renders the information leakage question moot.”
While they may have changed the requirement that all retail orders would need to be entered as retail priority orders,the Cboe still requires that retail priority orders must be designated with an identifier on their data feed. Therefore, the information leakage question is NOT moot. Apparently, here is why the Cboe thinks it’s a good idea to identify retail orders on their data feed:
“Designating Retail Priority Orders on the EDGX Book Feed will increase transparency by informing market participants when there is priority eligible retail investor interest available to trade on the Exchange, thereby allowing market participants to make informed routing decisions, including the decision to route contra- side interest to trade with such orders.”
Let’s be clear:
– the retail designation helps consumers of the Cboe proprietary data feed (primarily HFTs and market makers) to identify retail orders and decide if they want to trade with them.
– the retail designation enriches the content of the Cboe data feed which helps the exchange charge exorbitant rates for the data
– the retail designation enriches the retail broker who sent the order since they can receive higher rebates for retail orders.
As for the argument that retail market participants need to ascertain their position on the book, when was the last time you heard of a retail investor who was trying to figure out their place in the queue?
One of the things that sets Themis Trading apart from other brokers is our passion for market structure issues. While other brokers in the industry also are passionate about market structure, we’re not afraid to let regulators know our opinion and often formally submit comment letters on controversial stock exchange policies. We believe that our letter, as well as the other three comment letters on the Cboe proposal, was the reason that the Cboe was forced to explain their controversial proposal. We’re not sure what the SEC will do, but we’re happy that this proposal was not just rubber stamped and approved.