Nasdaq OMX Circulating Order Type Breakout
November 30, 2012
Nasdaq OMX this week has been circulating to its members an interactive rundown on how its order types work, assuring them that they can’t be used by any market participant to jump ahead in the queue for striking a transaction.
The presentation – a combination of audio descriptions with summaries and examples on slides, in synchronized chapters – was sent by email to head traders, technology contacts, compliance officers and executives of member firms. Securities Technology Monitor obtained a copy.
Nasdaq declined comment. But a party familiar with the production said the automated presentation is an attempt to educate members as well as investors on the workings of order types and how public bids and offers interact with non-displayed orders, often called hidden orders.
The broad mailing comes as exchanges face criticism for creating too many order types, often to meet the needs of what Themis Trading principal Sal Arnuk calls “ultra high frequency traders” intent on finding aways to jump ahead of rivals to bag small profits on high volumes of trades.
BATS Global Markets, for instance, disclosed at a Security Traders Association meeting in September that it offered more than 2,000 types of orders, when all possible permutations were counted up.
That has caused unnecessary complexity, according to industry professionals. And the Nasdaq multimedia presentation appears to attempt to combat that.
The presentation provides step-by-step descriptions and demonstrations of how the main order types of the Nasdaq Stock Market as well as the Nasdaq BX and PSX exchanges work. The primer covers these order types:
• Immediate or cancel
• Price to comply
• Intermarket sweep order
• Price-to-Display
• Non-displayed
• Post-only
• Midpeg post only
• Supplemental, and,
• Minimum life
The descriptions fore each are contained in these downloads for Nasdaq, BX, and PSX. The presentation itself, narrated by Michael Blaugrund, a vice president of Nasdaq OMX Transaction Services in the United States, makes no recommendations on how to best use order types, however.
But he specifically notes that “there are no order types that offer queue spot privilege or queue jumping.’’
That problem has been highlighted in a Wall Street Journal series called “Jumping the Queue,’’ with the prime example being an order type called “Hide and Slide.” In that order type, a nondisplayed order can rest hidden at a given price. If the bid and offer “lock” at that price, there is no spread and the offer may slide to a lower price. The hidden order then can jump to the head of the queue at the higher price, waiting for it to arrive when there is a spread that unlocks the market.
The Nasdaq order types are also available to all market participants, the presentation notes. In some cases, order types at some exchanges have been largely targeted at specific types of users, such as high-speed market makers.
