SEC Examining How Exchanges Develop Order Types
February 22, 2013
The Securities and Exchange Commission has begun inspecting how all the nation’s stock exchanges develop, refine and approve new types of buy and sell orders, in the face of a great proliferation in order types.
The inspections are being carried out by the SEC’s Office of Compliance Inspections, which disclosed what it called “assessments” of how exchanges manage the process of creating new order types, when it published its National Examination Priorities for 2013 Thursday.
Assessments are being conducted at all national stock exchanges, including the three operated by NYSE Euronext, including the New York Stock Exchange; the three operated by Nasdaq OMX Group, including the Nasdaq Stock Market; the two operated by BATS Global Markets; the two operated by Direct Edge, and NSX, the market once known as the Cincinnati Stock Exchange and now based in Jersey City, N.J.
Each of the exchanges has been sent documents seeking details on how they develop ideas for new order types. Those documents are now in the hands of OCIE, which will develop a series of questions that it will then seek additional information from each exchange on. The follow-up inquiries will include on-site visits.
‘’There has been a proliferation of order types over recent years,’’ said John Polise, head of market oversight at the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations It is important for us to understand how requests for order types are enacted, vetted and approved at each exchange before they get to the Commission.”
The inspections will be looking at the “entire life cycle of an order type” and look “across exchanges” to help identify best practices in governance and ultimately to help us analyze how members of each exchange use the order development process
The examiners will be looking at how methods of governing order creation and approval at each exchange are similar and how they differ. The regulator hope to establish best practices that the industry should adopt for managing order types individually and jointly.
OCIE’s findings will be shared with the commission, as well as its operating divisions. These include the SEC’s Division of Trading and Markets, which approves or rejects requests for new order types.