SEC action highlights order type controversy
I've suggested before that exchange order types might emerge as a big regulatory issue this year.
In the high-frequency trading era, exchanges and other execution venues have created perhaps thousands of order types, some of which have become quite controversial. The best example is the obscure Hide Not Slide order type, which some exchanges offer members. Such orders are now under investigation.
In a clear sign that regulators are serious about cracking down on possible abuses, the SEC has rejected a new order type that Nasdaq OMX has sought. The order type would've provided access to "a set of widely used computer algorithms that are usually provided to traders by large broker-dealers to engage in a computer-driven trading strategy," reports the Financial Times.
"Facing pressure from declining US equity trading activity, senior Nasdaq officials said they wanted to offer the new services to drive down costs for smaller trading firms that must rent the proprietary products from larger firms."
This apparently is the first time that the SEC has denied an exchange a new order type. At issue is regulatory immunity, which the certified exchanges enjoy when problems arise out of various trading practices. The SEC did not think that Nasdaq OMX adequately addressed exchange immunity and whether it imposes a competitive burden on brokers.
This has been a huge issue in terms of dark pools as well, as brokers that run dark pools regularly cry foul because they do not enjoy the same immunity that exchanges do.
- here's the article