EDGX Discovers Discrepancy in Mid-Point Match Orders
October 23, 2012
Direct Edge said that the system running its EDGX exchange has not been properly prioritizing some orders.
between its order priority rule, EDGX Rule 11.8 (a) (2), and existing functionality on the Exchange System, the U.S. exchange operator Direct Edge, said on Monday
The internal trading discrepancy has existed since EDGX officially launched as national securities exchange in July 2010, Direct Edge said, and only came to light when EDGX discovered it during a routine check of fundamentals. The deviation from EDGX Rule 11.8 (a) (2) has been reported to both regulators and exchange members.
The rule in question assigns priority to mid-point match (MPM) orders over, among others, non-displayed orders. The mid-point match order type is set to execute a trade at the exact midpoint of the National Best Bid and Offer on the EDGX Exchange.
In instances where the discrepancy occurs, however, non-displayed orders are given equal priority to MPM orders based on time of arrival.
Consequently if a non-displayed order limit order is resting on the EDGX book at the specific price, and a MPM order subsequently arrives at, or is adjusted to that same price, EDGX assigns priority to the non-displayed limit order based on its earlier time of arrival at that price.
Direct Edge wouldn’t say how frequently this satiation has occurred in the past. It says it is currently working to correct the disparity in accordance with the priority of orders set forth by Rule 11.8 (a)(2).
“To ensure that this change is properly coded and thoroughly tested, we anticipate this change will be effective Tuesday, November 6, 2012,” Direct Edge said in a notice to traders.
The SEC declined comment on the trading notice.
However, in its March 12, 2010, order approving the applications of EDGA and EDGX for registration as national securities exchanges, it stated that the applications’ registration was conditioned on their having adequate procedures and programs in place to effectively regulate the Exchanges, and, as noted in Commission Automation Review Policy (“ARP”) guidelines, to effectively process trades and maintain the confidentiality, integrity, and availability of the Exchanges’ systems.