OUT OF ORDER:
Are Controls Needed on Choice, Complexity and Competition?
January 10, 2013
But brokers and institutional traders suspect—or fear—that many of the new order types are set up largely to slant the playing field toward the trading firms with the shortest time horizons.
Enter a permutation known as the post-only order. “The ultra-high-frequency trading firms are doing everything in their power to come up with enhanced ways for them to (engage in) post-only order flow,” said Sal Arnuk, co-founder of Themis Trading in Chatham, N.J., and a critic of electronic mechanisms that allow such “predators” to get their orders to the front of a queue of orders in exchanges that are almost exclusively based on giving priority to the first order to show up at a given price.
The reason: rebates. Use of a “post-only” order allows a trader to “post” an order but “only” have it come into play if there is “adequate price improvement,” in BATS’s terms. That means, in turn, it’s able to earn a rebate for adding liquidity to the market, because it does not automatically take out a displayed order that might be resting on an electronic order book.
The post-only order is not particularly innovative, said Jamie Selway, head of liquidity management at agency broker Investment Technology Group. Plus, the focus on rebates “is not a good thing always. If you’re a broker and you’re concerned more about the fee you pay than best execution, that’s sort of a conflict of interest.”
As of Nov. 1, BATS charged 29 hundredths of a penny per share for removing liquidity from its primary exchange, known as the BZX market. Conversely, a firm got somewhere between 25 hundredths and 29 hundredths of a penny for adding liquidity.
That’s “only” 29 cents on each 100 shares being traded. But if you “add” 10 million shares of liquidity, it adds up. At $29,000 a day, that would be roughly $7.25 million a year.
But the type of order that has drawn the most scrutiny in the past year is something industry consultant and former UBS managing director Haim Bodek calls a “hide and light” order.
This is an order that is allowed to “hide” out of sight on an order book when prices are locked or crossed. Such an order can “transform from a hidden order into a Protected Quotation at precisely the time a market (is) permitted to display an aggressive price,” Bodek argued this fall in a series of articles on the Tabb Forum, an online discussion site.
The most well-known version of this came to be the Hide Not Slide order, from Direct Edge. This was used in a Wall Street Journal article featuring Bodek that attempted to show how such an order could allow a hidden order placed by a high-speed trading firm to jump ahead in line of an institutional rival for the same order.