In other words, HFTs could get around Rule 610 and the ban on locked markets by mastering this powerful exception that permitted the HFT to “step in the middle” and lock an away market. However, this exploitation of a clever end-around of Rule 610 presented a new problem: how to simultaneously maintain queue rank and get converted from a hidden order to a displayed order. Because hidden order types are ranked below displayed quantity according to binding exchange order precedence rules, the utility of such orders was fleeting unless a mechanism could be provided to reserve one’s place at the top of the queue when the market displayed.
“Hide and light” order types solved this problem of reserving a superior queue position by, in the industry jargon, “lighting” the hidden order automatically when the order would no longer result in a violation of Rule 610 (i.e., when the away market “unlocked”). In other words, the primary advantage embedded in a “hide and light” order was its ability to transform from a hidden order into a Protected Quotation at precisely the time a market was permitted to display an aggressive price. It should come as no surprise that the power of the order type was almost purely in its ability to get an HFT to the top of the queue.
Hence, the “lighting” process became key to dictating an HFT’s queue position. In essence, “lighting” is the key event in which an exchange picks the winners and losers in achieving a superior queue position.
Most institutions are not even aware of the dependence of HFT strategies on exchange “lighting” events. For several years, and including to this day, the mechanisms through which orders that “hide and light” are converted from hidden orders to be rebooked as Protected Quotations are improperly and inadequately documented.
Over the period from 2007 to 2012, the introduction of special order types that “hide and light” proceeded quite quickly, as exchanges matched each other feature for feature with intense competition for HFT order flow. NASDAQ released Price to Comply. BATS released Display-Price Sliding. NYSE ARCA released Post No Preference Blind. Direct Edge released Hide Not Slide. Such order types were repeatedly modified, usually to address specific microstructure nuances that primarily impacted HFT scalping strategies. For example, certain exchanges eventually modified the feature set of order types that “hide and light” to define the specific conditions in which such orders would interact with midpoint liquidity. Another area of modification involved the conditions in which aggressive “post-only” instances of such orders would incur taker fees instead of the intended rebate capture. Lastly, the “lighting” process itself evolved significantly on a number of exchanges.
For what might appear a relatively simple order type, the number of permutations, modifications, and microstructure features (many material elements of which remain undocumented) that were introduced over this period for orders that “hide and light” is astonishing.
It is important to note that exchanges did not mandate the use of “hide and light” orders, but the importance of such order types for those HFTs engaged in “spam and cancel” strategies was undeniable. For all practical purposes, hide and light orders existed to assist HFTs in getting to the top of queue, particularly ahead of “spam and cancel” strategies.
BATS, being particularly aggressive with the adoption of special order types that “hide and light,” summed up quite elegantly the appeal of such order types: “Display-Price Sliding eliminates the need for traders to retry orders multiple times in rapid succession trying to be high in priority at the next NBBO price.”
Where was the institutional client in all of this? For institutions using default exchange modes that subjected their orders to traditional price-sliding, they remained placed a tick back at the back of the queue away from the trading action. Even institutions that utilized orders that “hide and light” intentionally or as a default option -- but that were not versed in the special relationship between Rule 610, the processing of the SIP feed, exchange order matching engine practices, and the special order types themselves -- were unlikely to send orders in the appropriate usage conditions.In fact, HFTs themselves did not think institutional order flow had a competitive stake in the game at all. They thought of the battle as HFT vs. HFT. And they were right. Yes, speed matters -- but only if you know what order type to send and when to send it.
In summary, to address the ban on locked markets, exchanges provided special order types that would “hide and light” orders. These order types were not mandated by exchanges, but appealed to high-speed traders formerly engaged in “spam and cancel” strategies. While HFTs employing “hide and light” order types faced off against older “spam and cancel” strategies, the institutional investor had become even more sidelined by an HFT-oriented market structure, unable to effectively participate in the trading action.
In the next article, we will explore the evolution of Intermarket Sweep Orders (ISOs) and the unique relationship between such orders and the “lighting” process on an exchange. In fact, the ISO, veritably the queen of special order types, is particularly powerful in its ability to step ahead of special order types that “hide and light.”
Comments | Post a Comment
43 Comments to "Locked Markets, Priority and Why HFTs Have an Advantage: Part 2: Hide & Light":
sarnuk
16 October 2012
Question? Would HFTs use these orders when they are providing liquidity? Or when they are stepping in front and maximizing rebate collection modules, and taking advantage of GUARANTEED profits by the stock exchanges? Wait... those are the same aren't they...
Comments (160)
crammond1964
17 October 2012
on pro-rata STIR contracts this isa massive advantage and something the exchanges have totally denied ! Does explain how new companies like RSJ rose up the ranks .
Comments (252)
asussman
17 October 2012
It is heartening to see so much effort go into complying with Rule 610. I think the industry deserves a pat on the back for even bothering to comply.
Comments (159)
Anonymous
17 October 2012
Where is the advantage? Are these order types not available for everyone?
Moreover, I thought that HFT firms uses the OUCH protocol which does not support complex orders
hbodek
17 October 2012
All market participants who place aggressive non-marketable orders on these exchanges are doing a disservice to their customers if they are not well versed in the appropriate usage conditions of these order types.
"Hide and light" functionality on OUCH is here: http://bit.ly/QATOus
Comments (20)
sarnuk
17 October 2012
Adam, if they were complying with Rule 610 wouldn't they (exchanges) be using incredible speed and technological prowess to route a locked order, and not figure out ways to not make a buy order and sell order priced at the same price NOT trade? Or are you tongue in cheek? They are coming up with these order types to appease their largest clients, HFT market making firms, who want the rebate and never the take.
Comments (160)
hbodek
17 October 2012
Great summary of Blair's June talk. "Hull Warns of HFT Cancellations & the Illusion of Liquidity"
Comments (20)
Anonymous
18 October 2012
Are these issues specific to US equities markets only, or to non-US/non-equity markets?
crammond1964
18 October 2012
exchanges really should have their RIE status immediately withdrawn ; and despite their protestations they are guilty of being econimical with being honest and fair with all their customers .
HFT have only been allowed to steal positions because exchanges have offered them the service ; sadly the exchanges cannot be suspended .
Comments (252)
hbodek
18 October 2012
For those who want to dig into the details, here are the most recent developments at BATS with regard to Display Price Sliding:
Aug 14th, 2012 SEC filing on significant overhaul of BATS matching engine to modify price-slidng features http://1.usa.gov/RVmTgo
Oct 4th, 2012 fix to unsliding bug. http://bit.ly/U8VQ7T
Comments (20)
hchien
18 October 2012
Haim thanks for enlightening us all on the topic - this is great. Put aside the issue of an entire industry focused on gaming the order stack - in your opinion -what is the negative impact on the end investor? (Or perhaps I'm just itching for part 3... )
Comments (34)
crammond1964
18 October 2012
I heard a little bird tell me that CME europe new exchange is offering their exchange to be void of HFT colocation advantages and return to an evener playing field
Comments (252)
cmackie
18 October 2012
Very well written; thank you.
I'm interested in your answer to hchien: what is the negative impact on the end investor?
Comments (26)
hbodek
18 October 2012
The cost of inferior queue position is not well covered in the academic literature. In a 2010 submission to the SEC (http://1.usa.gov/R6z7qD) Manoj Narang stated that "Empirically there is a 1.7 cps difference in profitability for a posted share that is first in line vs one which is last in line" That magnitude of slippage is entirely consistent with my direct experience. Pragma also recently wrote on queue utility in "The Difficulty of Trading “Ultra-Liquid” Stocks" (http://bit.ly/T35C9Y).
Execution services providers who have not adapted their offerings to properly access HFT-oriented market centers expose institutional investors to increased direct and indirect transaction costs. Execution services providers who discount the importance of HFT-oriented exchange features in the major markets are in fact the primary parties who have sustained the unprecedented HFT volumes of the last five years.
Comments (20)
Anonymous
18 October 2012
Come on. To do away with excess HFT trade/cancel (as you call it "spamming"), the exchanges created these new hidden orders. So in essence they reduced quote volume to the benefit of all customers.
These order types are available to all customers. Just because institutions are too slow or lazy to use them, doesn't make it illegal or nefarious. Maybe these poor, defenseless institutions should upgrade their servers from running windows 98 to something from this decade.
sarnuk
18 October 2012
This is interesting to me. Anonymous - Are you suggesting that Bulge Bracket Brokers routing orders through FIX have the exact same functionality and features... EXACT... that HFT market makers do who do not going through FIX? Please confirm - I think it is important. This is something most institutions have not thought about. If there are different features on one set of pipes than the other set of pipes, well, then I think that might be an issue for the stock exchanges.
I am thinking that most bulge bracket brokers that send institution child orders through their pipes and algos are using FIX. Please let me know if I am misinformed.
Comments (160)
ltabb
18 October 2012
Sal, I would agree that the majority of folks (institutional brokers) are not colocated in each data center - they typically pick one and send child orders via fix to the different execution venues. That said they are at a disadvantage. There are a few that are beginning to distribute the order out to the venues and trade in parallel from colocated venues. But that is expensive and difficult to manage as you can get double executed if you are not careful. Also harder to manage risk when you have distributed execution. There are the others that are using sophisticated order routing to hit all of the exchanges at exactly the same time too. But buy and large the majority I think are mostly FIX from a proximity center.
As for 1.7c slippage - that seems like a lot but it isn't something we have studied. Will look up the pragma report.
Comments (303)
sarnuk
18 October 2012
Larry, I'm not referring to colocation advantages. I am curious as to what Hide Not Slide type features are available to folks using both sets of pipes. I would hope that the exact same functionality and features are available to all clients without regard to their pipes. Id they didn't, I would think there would be an unfairness issue. Are all order types, available similarly and equally to all exchange customers? Are the same features and modifiers for order types available to those who electronically play in the marketplace via FIX as they are to those who electronically play via other means? I think this would be an excellent question for an exchange executive, or even perhaps for a valued forum contributor like Dave Cummings, who commented on Haim's last article.
Comments (160)
ltabb
18 October 2012
Sal,
The colo is important as if the hft's are battling for the top of the book against a broker who isn't coloed then the broker will always lose. Cause even if the broker gets direct data and uses the same tactics (say hide not slide or even spam and cancel) the coloed guy will always get there first - pushing the broker back even further.
Comments (303)
sarnuk
18 October 2012
Thanks Larry. You are correct. My question though is outside of the choice of colocation. I am asking if the exchanges make each and every feature of theirs to all players equally, specifically all of the features of the order types that they file for and receive approval from the SEC on.
In other words, can yo u choose to use all their order types AND all the feature/nuances in them regardless of whethe you come through FIX or API? This includes options for resliding, etc.
Comments (160)
ltabb
18 October 2012
that is a good questions sal. So basically what you are asking is, can you leverage the full set of functionality via a fix connection or do you need to migrate to folks proprietary APIs to leverage the full suite of functionality?
Anyone know this?
Comments (303)
hbodek
18 October 2012
Historically NASDAQ had the most striking differences between their various protocols. They started normalizing late last year, though key differences remain. Here is a table comparing order type availability per protocol. http://bit.ly/Tgtt85
Comments (20)
Anonymous
18 October 2012
If your BB broker is using FIX to the exchanges, change your broker. Most BB brokers have colo and proximity hosting for their own operations. Ask them to give you direct connections to the exchanges and use your own smart order router.
Stop complaining about the HFT guys and start complaining about your slow brokers. Ask them to give your latency numbers for they feeds and order routing. If they don't want to upgrade their client access infrastructure switch brokers. Believe me their prop desks (many of which run HFT strategies) have the fastest connections to the exchanges. There's no reason why they can't provide the same level of access to their brokerage clients.
hbodek
18 October 2012
Though there are many features at exchanges I believe must be changed, I do agree with anonymous that if you cannot leverage an exchange feature-set because of your broker, you need to find a new provider.
Comments (20)
sarnuk
18 October 2012
Anonymous and hbodek,
First off I appreciate your candor hbodek. This is not a witch-hunt against HFT for the benefit of Fred and Ethel's 401k. And you speak with a viewpoint out in public, with a bullseye on your back. We know what that feels like.
From the beginning, at least at Themis, this has been about a market structure that has uneven playing rules. Stock exchanges have always been termed Self Regulatory Organizations because they presumably have the responsibility to have equal playing rules for all, and maintain fair and orderly markets. And should that first ever-so-important line of defense for every day investors fail, we are supposed to take comfort in the safety net that is the SEC. This is their mission statement: "The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
But before I talk more about market philosophy, I would like to address Anonymous's statements. I suppose I wish he wasn't anonymous - I think we have had enough darkness and opacity to last us lifetimes. So be it. I will debate someone who knows who I am, and my motivations, without being extended the same courtesy. That's ok. I am used to darkness and uneven playing fields.
You contend that the exchanges, in their attempt to do away with excessive HFT quote and cancels, a burden to their systems for sure, implemented new sliding add-liquidity-only order types. You contend that they did this for "the benefit of all customers".
1) Could not the exchanges have simply routed out to avoid the locked market, as was the intent of the SEC? Wouldn't that benefit all customers? Imagine - a buy order at 50 cents would actually trade with a sell order at 50 cents!
2) I will go out on a limb and say that the exchanges developed these order types expressly for the benefit of HFTs. I will contend that HFTs received a quicker way to get to the top of the queue, and made more money, and generated more volume. The exchanges received a way to control quote volume - an exponentially growing problem, and certain ultra- HFTs got order types they helped design and asked for. They made money. Sounds like the exchanges made ultra-HFT an offer they couldn't refuse. Now as for the investors who were "benefited"... were they benefitted because the view from the back of the queue was so enticing?
Anonymous, you defend stock exchanges selling speed as a business model. And you defend their giving their largest customers additional enhanced order types. And you defend their creating an environment that guaranteed profits (yes guaranteed) are something that can be bought by buying their premium services.
I respond that that argument works for Hertz giving better economics to their fleet customers (high volume) as opposed to Fred and Ethel renting a car for a weekend Catskill trip. That argument falls apart when applied to Self Regulatory Organizations, who have responsibilities (allegedly) outside their own short term profit goals. Shame on them for not realizing that. And shame on the regulators for being complicit.
Years ago an industry standard (FIX) was adopted. This was an excellent example of how leveraging technology made the markets more efficient. Mutual funds could do away with phones and paper, and errors, and deliver order flow to brokers and market centers in a uniform industry-accepted way. You claim that institutions are dopey and lazy for using it still, as are every brokerage firm on the street (yes every). I claim that for-profit exchanges, who are also SROs, could easily give the same features via communication method. They chose not to. Why is that?
This is not about adapting. This is about even playing fields. I will love the day when everyone has the same rules and access. Under those conditions I will cheerfully encourage you to travel at ludicrous-speed, dig all the mountains you can, buy all of IBM's and Cisco's servers that they can produce. Under those conditions.
However, my gut tells me you wouldn't need all of those things if the deck were not stacked in your favor. And even now, I assign but a 1% blame for your role in the perversion that has overcome the greatest market system in the world. I reserve the other 99% for the for-profit stock exchanges and the regulators for allowing it.
Comments (160)
hbodek
18 October 2012
sarnuk is correct in that "Hide and Light" order types were introduced to court a specific type of customer (HFTs) running a specific type of strategy (HFT scalping), and had nothing to do with the what anonymous referred as the "benefit of all customers". It had solely to do with the benefit of specific customers who requested and benefited from such order types.
Exchanges could have introduced cancel fees to limit "spam and cancel" strategies as was applied to non-market makers in the options markets at the time. Instead they provided a more lucrative route to the top of the queue, an offer of P&L enrichment that HFTs could not refuse. The impact of a number of specific exchange modifications upon the profitability of market participants (for both winners and losers) begs the question as to what extent SROs fulfilled obligations to maintain fair and nondiscriminatory markets. My view is that if you have had difficulty interacting with HFT-oriented market centers and these order types were not marketed to you as a solution, you should be asking the exchanges and/or your executing service provider some very tough questions.
And this bring us to a last point. To say institutional investors could simply use the order types is self-serving, as one needs to know exactly what to order type to send and when to send it. That is why the question of exchange disclosure and documentation is so key - if you don't have the operating manual, you don't have a chance. Until market structure reforms occur, anonymous is correct that the onus is upon institutional investors to develop expertise interacting in HFT-oriented market centers that facilitate as hchien put it "an entire industry focused on gaming the order stack."
Comments (20)
Anonymous
19 October 2012
There's nothing 'hidden' or secretive about these order types. All the information is on the exchange websites. Everybody loves a conspiracy theory...
Anonymous
19 October 2012
Sarnuk, hbodek: I'm not a HFT guy, just a lowly market data guy not affiliated with any exchange or HFT shop. My interest is purely technological but I happen to know a little bit about HFT and exchanges. So I prefer to remain anonymous if you don't mind -- I need to keep my day job. That said, your argument that there is not a level playing field has several holes:
1) All exchange customers have access to the same order types. The exchanges don't hide the information. Everything is on the web, and if you have questions, there are support personnel who can help you.
BTW, your broker knows all about these order types. They have dedicated market data teams that get every update notice from the exchanges. If you as a client are unaware, then you need to ask your broker. They can give you information on how to use them. The brokers or exchanges can't tell you how to leverage specific order types, that depends on your strategy. The HFT guys experimented with different order types and methods to develop their strategies. Nothing prevent you from doing the same.
If your brokers standard algos don't take advantage of these order types, ask them to change the algos. They have hundreds of programmers who can do this. Push your broker to give you better products to compete with HFTs.
2) Reducing quote message volume helps all other customers especially those on slow, limited bandwidth WAN connections. You and Haim described 'spam and cancel' as denial of service due to excessive quote messages. Doesn't lowering message rate help in this case?
3) Exchanges do route orders that are within the NBBO to other exchanges if there's not a better quote in their own system. They don't route out simply to avoid crossing the book, because they don't control the far exchange's books. They could inadvertently cross the far exchange which would violate regulations.
You're under the impression that all exchanges have an instant view of every other exchange. This is simply not the case, they have the same routing delays as you would if you tried to establish connections to all the exchanges.
Also the NBBO feed from SAIC is known to be a few hundred milliseconds slow. Using this NBBO would result in a delayed view of the far exchanges top of book. This is one area where the regulators should interceed. SAIC needs to stop routing all the exchange feeds to San Francisco before aggregating them in to the uqdf/utp feeds. Having a faster NBBO feed would normalize the playing feed a bit more.
4) You're definitely going out on a limb to claim exchanges created specific order types to benefit certain customers. If all customers have access to the same order types, how is one customer benefited over another. There is nothing preventing you or your broker from using these order types. See above.
5) Everyone knows that FIX is slow. It requires extra processing for every message. Add to that the delay in routing over a WAN connection from your lake house, then you're definitely going to loose to someone who's colocated. But that's your problem not the SEC or the exchanges. Use a binary protocol and colocate your servers. If you don't want to make the investments to keep up with faster players, maybe you should question your business model. Complaining to the govt so you can save a few bucks in colo fees or faster servers is not fair.
6) I can't speak about cancel fees. That's an exchange business practice. Just like your clients can't speak about your own fee structure. Private exchanges are in business to make a profit just like everyone else in this business. But to claim they do this by benefiting one set of customers over another is a strong assertion that requires more proof than I'm seeing in this article so far.
I'm looking forward to reading the next article. This is a lively debate and one that we need to have, but it needs to have balance. We need the exchanges to respond, Larry.
Respectfully,
Anonymous
Anonymous
19 October 2012
It occurs to me that several of the big US exchange groups also operate markets in Europe. So, if the exchanges were entirely responsible for tilting the playing field, then the same problems would manifest themselves in European markets - but I'd argue that they don't.
European venues without the complex order types - there are no hidden order types for HFT to use, no Hide/Slide, no price discretion. There's also no Reg-NMS, no routing obligation, no consolidated quote. Thankfully there's been no flash crash - not even in an individual stock - because circuit breakers have been in place for years.
Yes, there is still colocation, and there are still multiple protocols (although contrary to what's been said above, the faster protocols tend to offer less functionality/flexibility than FIX) - so speed matters to some market participants more than others. But co-lo is itself subject to "fair access" rules - so the playing field on speed is even (or at least "equal opportunity").
So the market operators are the same, the market participants are the same, and yet the landscape is entirely different - which tends to point in the direction of the regulatory framework (or arbitrage of it) being the true source of the complexity?
crammond1964
19 October 2012
hide and slide orders have been on liife nyse for last 4 years and in STIR contracts on pro rata is totally out of order . To say it offered to all customers is just not true .
Exchanges have only just admitted this fact and as yourself use their anonymous tag ! Sadly folk who want anonimity are fairly wide on facts .
Comments (252)
Anonymous
19 October 2012
I don't understand how an exchange could ever hide a new order type? All protocols specifications are publically available. So are you implying that exchanges have implemented a new order type, then only released a new protocol specification to some of its members?
Hide and slide order doesn't make sense in Europe as we don't have an official cross-exchange BBO to measure against.
Anonymous
19 October 2012
Sorry Crammond - from all of the debate above, I've assumed the topic was equities rather than derivatives.
As for derivs - since the European regulatory landcsape doesn't really permit competition/fungibility in derivatives trading, there's nowhere else for a venue to route to. So each venue has it's own order book, and that's that. In the context of a single, centralised order book (which people have advocated in this thread), I'm not sure what a "hide and slide" order would actually be.
Can you explain and point us towards the order type in Liffe's interface specs? I had a quick browse and all I can find is the following:
‘1’ = Market
‘2’ = Limit
‘3’ = Stop or Stop Loss
‘4’ = Stop Limit
'W' = Market On Open (MOO)
'S' = 'Trade At Settlement (for future use)
lkovach
19 October 2012
This discussion is spreading. Check out Herbert Lash's article for Reuters: "Complaints rise over complex U.S. stock orders"
Comments (31)
lkovach
19 October 2012
Former SEC general council Ralph Ferrara: "Fragmentation ... has to be reversed." Financial Markets Aren't Rigged, They're Broken (video)
Comments (31)
sarnuk
22 October 2012
And Direct Edge today: http://www.reuters.com/article/2012/10/22/us-exchanges-directedge-idUSBRE89L15X20121022
Comments (160)
hbodek
23 October 2012
Hi Anonymous,
The queue jumping as reported by the WSJ is a feature that is inadequately documented by the exchanges and applies to a number of special order types. It is a feature of primary importance to HFT scalping strategies. I am not sure why you believe brokers are aware of inadequately documented features. Here are two quotes from individuals who were directly involved in the development of such features:
“We tweaked how the order would interact with our book according to what they wanted. A lot of the unique orders were created at the request of a customer, typically a high frequency customer. You had to be a sophisticated customer to learn how to use it. They'd send it in and we'd respond. It was a happy little circle." Dark Pools, 237.
“It became about meeting the needs of that specific HFT community,” says a technologist who worked for several top ECNs and exchanges in the 2000s. “…It’s all about what functionality I can offer the HFT that they can take advantage of. We are going after guaranteed economics.” Dark Pools – Page 204
Haim
Comments (20)
Anonymous
24 October 2012
One could claim that 'Reserved' orders benefit large institutions over traders by hiding the actual size displayed on level 2 quotes. Add to that, slice and dice algos that chop up big orders, dark pools and IOIs for private trading -- all these benefit the big players over the retail trader. So were these order types created to benefit one group over another? Probably.
Even if the details of the order type are sketchy, it's not difficult to reverse engineer their behavior. HFTs have been doing this all along. That's how they first learned to take advantage of microstructure trading. Send a few orders in and observe the state of the book and estimate your place in the queue.
I absolutely believe that the BB brokers know the details of these order types (poorly documented or not). All the big firms have their own prop trading groups running HFT algos. If the prop groups didn't use these order types, they'd be out of business. Information flow from the prop side to the sell side may be limited, but the institutional knowledge is there and customers should demand better support from their brokers to understand these order types. The biggest customers of the exchanges are the BB brokers, if the brokers weren't there neither would the HFTs. Put the brokers to work to sort out the rules, there's no need for new regulations with unintended consequences.
That said, I agree the exchanges need to document all protocols and order types properly so *all* customers can comprehend and use them appropriately. Their infrastructure and machining engine code should be open for review by the SEC. But fewer exchanges may not be the answer. Less competition leads to higher costs.
lkovach
24 October 2012
Scott Patterson and Jean Eaglesham at WSJ repors that the exchanges are beginning to crack under the presssure: Exchanges Retreat on Trading Tools -- Fund Managers, Regulators Say Certain Orders Are Risky, Aid High-Speed Firms
Comments (31)
hbodek
24 October 2012
Hi Anonymous,
I like your willingness to challenge my arguments, and I think you would be surprised that I am sympathetic to your line of reasoning.
I agree asymmetries will always exist in market, but to the degree that such advantages exist they need to be made explicit and submitted in rule filings. Otherwise insiders have an unfair advantage.
I agree that market participants need to make reasonable efforts to use exchange features correctly, but exchanges need to be forthright about what features matter and need to provide their "cheat sheets" in a fair and equitable manner to all exchange members in their business development and marketing activities.
For example. queue jumping is extremely difficult to detect in market data or any type of "experimental" testing unless you have already been made aware of the operational mechanisms behind this advantage.
After the full set of HFT-oriented exchange functionality and order matching engine practices are adequately disclosed and made consistent with regulatory filings, I agree it is the obligation of executing brokers to utilize the exchange functionality adequately in servicing their institutional clients.
We are facing an industry-wide issue that needs leadership from exchanges, HFTs, the sell-side, and the buy-side, and of course regulators. It is not a question of whether HFT is good or bad. It is about correcting deep asymmetries that a real majority sense need to be addressed in this highly fragmented and complex marketplace. It is time to level the playing field.
Haim
Comments (20)
FaultyAdder
24 October 2012
There is a lot of innuendo (both in the article and in the comments) about how various complex order types were properly explained only to a certain set of players. Do we have any evidence of this? Do we have a specific instance of how an order type's behavior was materially different or more involved than what has been publicly documented (either by design, or inadvertently through a bug), and that this was selectively made known to only one set of market participants? Pulling up quotes showing how various order types were designed in consultation with various people is not enough; what happened after the design phase, when it came to disclose and publicly document these order types?
Anonymous
24 October 2012
I don't want to pick on Direct Edge but if you look at their description of hide not slide in their NextGen Guide to Order Types at http://www.directedge.com/Portals/0/docs/NextGen%20Guide%20to%20Order%20Types.pdf and then look at how the WSJ wrote this up - http://online.wsj.com/article/SB10000872396390444812704577605840263150860.html
There is certainly a difference between how it is described. Now I am not saying that the WSJ article is right, but there certainly a difference in language.
sarnuk
24 October 2012
Do we have a specific instance of how an order type's behavior was materially different or more involved than what has been publicly documented (either by design, or inadvertently through a bug)?
BATS, in an August 14th, 2012 SRO rule filing, "non-controversially" amended how price sliding and Post-Only interactions were to be handled at the exchange. In footnote 8, they actually corrected a May 12th 2011 SRO rule filing which stated that the BATS exchange operated a certain way, when it operated a different way.
I am still trying to figure out how it all works. I am, however, floored that there are so many orders (post only) that are not interacting with orders on the other side at the same price. And I am trying to look at all of these changes through prisms, because I feel I am missing something. Being most charitable, the complexity is stunning.
Comments (160)
lkovach
26 October 2012
Look for Part 3 of Haim's series on Monday. It looks at Intermarket Sweep Orders.
Comments (31)