Another look at order type proliferation


The industry has come a long ways from the days when market and limit orders types ruled the roost.

In the high-frequency trading era, exchanges and other execution venues have created hundreds upon hundreds of order types, some of which have become quite controversial as yet another market structure puzzle. I noted recently that a whistleblower has been working with the SEC as the agency explores the obscure Hide Not Slide order type, which some exchanges offer members.

The idea for traders is that orders that enter the market system at a price that would lock or cross the NBBO are booked at the entry price but are "hidden" in that they are not displayed in the NMS. But once the price is set free, it will be displayed. The whistleblower charges that some exchanges--Direct Edge and BATS have drawn scrutiny on this issue--allow these hidden orders to jump the queue, ahead of some limit orders. Reuters weighs in with a look at the big picture.

"Order types can reach an estimated 2,000 variations as a fully electronic market and more than 50 trading venues have multiplied the possibilities of how, when and with whom to trade. And they have changed how buying or selling interest in the market is detected. Using order types to outsmart other traders has become the latest skirmish in a battle over the merits of high-frequency trading. While the proliferation of new order types baffles many market participants and has sparked talk of abuse, little proof of manipulation has shown up so far."

Sal Arnuk, a prominent critic of our current market structure, was quoted saying, "My point is the exchanges are providing their largest customers by revenue and volume, guaranteed economics. If that's not a red flag, I don't know what is."

The exchanges defend their order types as fair and transparent, but the SEC has yet to tip its hand in terms of what it thinks about this trend. It may rank low as a high-frequency trading issue.

For more:
- here's the article