NYSE Order Revamp Seen Worsening Conflicts That Sprecher DecriedSam Mamudi
The New York Stock Exchange, whose owner has been at the head of efforts to improve U.S. equity markets, is asking regulators for permission to alter order types in a way that is drawing criticism on Wall Street.
At issue is a proposal to modify the way brokers are permitted to deploy a particular instruction to trade stocks known as an intermarket sweep order. Under plans disclosed to NYSE Group Inc. customers yesterday, the exchange would allow such orders to rest on the venue and in some cases qualify for rebates when another broker trades against it.
Order types have become a flash point in the debate about electronic markets, with critics such as former Goldman Sachs Group Inc. trader Haim Bodek saying they are tailored to give high-frequency traders an edge over individuals. While revamping the protocols has been a goal of Jeffrey Sprecher since his Intercontinental Exchange Inc. took over NYSE, Bodek said the new features could make things worse.
“It is discouraging that NYSE is sneaking in an advanced HFT order type that I have previously described as the queen of the order types,” said Bodek, who took his allegations of wrongdoing involving order types to the U.S. Securities and Exchange Commission as a whistle-blower in 2011. The change “would give the ability for a trader to get ahead of investor orders using fast price feeds and regulatory exemptions while receiving a rebate,” he said.
The way stock venues design orders has received some of the harshest scorn from critics of modern trading. Three months ago, Sprecher, the chief executive officer of ICE, pledged to pare them back because they add to complexity and encourage needless buying and selling. NYSE plans to abolish 12 order types and eliminate five other ways to modify trades, according to yesterday’s notice.
Intermarket sweep orders have drawn scrutiny in the past because they can allow traders to trade on one market even when better prices exist on another. The rules that caused the American stock market to fragment into dozens of venues over the last decade generally require requests to buy or sell stocks be routed to the place with the best price.
Bodek, in a November 2012 article for research firm Tabb Group LLC, called intermarket sweep orders that are allowed to sit “perhaps the most powerful order type in the HFT arsenal.” NYSE’s filing also says the protocol, known as Day ISO, can be combined with the ability to get a rebate, a feature often called a Post-Only ISO, something Bodek called a “supercharged order type.”
Rebates, part of an incentive system known as maker-taker, have themselves been the target of market infrastructure critics. Even Sprecher has recommended banishing them.
When speaking on a May 8 conference call, Sprecher said “execution venues have further complicated markets by creating order types” that encourage trading to receive those rebates, according to a transcript compiled by Bloomberg.
“The imbalance in maker-taker fees creates fee arbitrageurs that add to market volume while simply trying to buy on one exchange and sell on another in risk-free trades while not actually wanting to own stocks,” he added. “Encouraging transient liquidity signals is potentially as risky as encouraging transient price signals.”
Bodek said the plan from NYSE, which is the world’s largest stock exchange by value of the companies it lists, misses the mark.
“It doesn’t appear they have eliminated a single HFT order type,” he said, referring to high-frequency trading.
Eric Ryan, an NYSE spokesman, said that although the company won’t comment further on the details of the filing, it remains committed to improving and simplifying the U.S. equities market. The requested changes would bring NYSE in line with other public stock exchanges, including the company’s own NYSE Arca venue, he said.
“We have proactively filed to remove 12 order types on NYSE Arca and modify two order types on the NYSE to make all the remaining order types operate consistently,” Ryan said in an e-mail.
In the filing, the exchange says the modified order types would help in part by “encouraging additional displayed liquidity on a public registered exchange, and therefore promote price discovery.”
The SEC announced in 2012 that it was investigating order types. Bats Global Markets Inc., a NYSE competitor, is in negotiations with U.S. regulators to settle accusations that Direct Edge, the stock exchange operator it bought in January, offered order types that gave unfair advantages to high-frequency traders, a person familiar with the matter said this week.
(An earlier version of this story corrected Haim Bodek’s job description in third paragraph.)