NYSE to Curtail Order Types Amid Debate Over Their FairnessSam Mamudi and Matthew Leising
The New York Stock Exchange wants to pare back the types of orders customers can place, potentially quieting critics who say their proliferation gives high-frequency traders an unfair edge.
NYSE staff have identified more than a dozen to abolish, pending regulatory approval, IntercontinentalExchange Group Chief Executive Officer Jeffrey Sprecher said today. Shares of Atlanta-based ICE, which bought NYSE last year, fell the most since 2011 today after the company released quarterly results.
In a “first step toward making our markets less complex, we will voluntarily reduce the number of order types at our U.S. equity exchanges,” Sprecher said during a conference call with analysts. “We will continue to evaluate our other order types to identify those that may not be providing the market with true utility.”
Order types, the software routines used by brokers to pinpoint the price and size of trades they’re willing to conduct, have been targeted by critics who argue the U.S. stock market is unfairly structured. Haim Bodek, a former Goldman Sachs Group Inc. programmer who has achieved celebrity in the debate surrounding high-frequency trading, says traders use them to cloak plans to buy or sell shares, giving them an advantage over other investors. Bodek has taken his allegations of wrongdoing fueled by order types to the U.S. Securities and Exchange Commission as a whistle-blower.
“I am surprised Sprecher took such a strong leadership role in resolving the order type controversy,” Bodek said by e-mail today. “I applaud his efforts and hope other exchanges will follow.”
Eric Ryan, an NYSE spokesman, declined to provide further details about the order types that might be eliminated.
Sprecher today called on other market operators to “adopt a moratorium” on creating new order types. U.S. equity trading is spread across more than 50 venues, including the three exchanges run by ICE. Nasdaq OMX Group Inc. and Bats Global Markets Inc. are the other major exchange owners. About 40 percent of trading takes place off exchanges.
During the same conference call, ICE Chief Financial Officer Scott Hill said that while there’s no set date for the company’s spinoff of Euronext NV, it’s still expected next quarter. Euronext runs stock exchanges in Europe.
ICE shares today fell 4.8 percent, the most since November 2011, to $192.14 following the quarterly report. The company posted earnings excluding some items of $2.60 a share, missing the average analyst estimate of $2.61 a share, the first shortfall in two years, according to data compiled by Bloomberg.
ICE forecast its expenses will rise in the current quarter and said revenue from technology services, trading license fees and other services will trail analysts’ estimates.
“The company’s updated guidance is disappointing at first glance, with operating expenses moving higher” and other revenues set to decline, Alex Kramm, an analyst at UBS AG, wrote in a note to clients today.
Sprecher has been improving the technology that runs the NYSE. His company bought Algo Technologies Ltd., which was formed in 2010 by executives with backgrounds in high-frequency and quantitative trading, to drive NYSE’s U.S. markets, people familiar with the matter told Bloomberg News last month.
Although he didn’t identify Algo Technologies by name, Sprecher said today that ICE made an acquisition to create a “single, fast, lightweight platform that is reliable.” The goal is to use the same matching engine -- an industry term for the software the pairs buyers and sellers on an exchange -- on all of NYSE’s stock and options markets, he said.
Sprecher also addressed other criticisms of how the stock market operates, including concern over feeds offered by exchanges that let traders get data on stock prices faster than is available through the official, public ticker. The practice has been highlighted by New York Attorney General Eric Schneiderman as enabling high-frequency traders to take advantage of other market participants.
Delaying when NYSE exchanges send their data feeds to bring them in line with the public feed, known as the SIP, wouldn’t help unless there were also delays to trade confirmations that firms receive after executing transactions, Sprecher said. Traders who frequently buy and sell small amounts of stocks can use those confirmations to gain insights about where the market is moving even without data feeds.
“If the raw data were delayed to match the output of the SIP, this would give active traders significantly earlier knowledge of stock movements, well before the public as a result of their active trade confirmations,” Sprecher said. “This time advantage would be big enough to drive a truck through.”
Any effective solution to the data feed issue, which could include slowing down the faster feeds, speeding up the SIP or combining the feeds into one, would also need to slow down trade confirmations from all venues, Sprecher said.
Sprecher defended colocation, another criticized practice, which allows brokers to place their computers in the same data center as an exchange’s servers, saying it was the “most fair” way to serve all customers.