Flash Point

Equities industry clashes over flash and step-up orders

Traders Magazine, July 2009

Nina Mehta

Wall Street has a long history of internecine warfare among market centers such as the New York Stock Exchange and Nasdaq. Recent times are no different. A relatively obscure order type made popular by Direct Edge ECN has managed to generate a firestorm of controversy, with exchanges and broker-dealers alike now trash-talking the tactic.

At an industry conference on market structure in May, a panel on market centers broached the subject of "flash" orders and almost ended in fisticuffs. In one corner was defending champion William O'Brien, CEO of Direct Edge. In the other was Larry Leibowitz, his hot-under-the-collar opponent from the Big Board.

Leibowitz threw the first punch by leveling charges of elitism at O'Brien's market. The head of U.S. execution and global technology at NYSE Euronext assailed Direct Edge's Enhanced Liquidity Provider or ELP program as the "enhanced look" program, comparing it to the advance look at orders that NYSE specialists used to get. That practice was seen as giving specialists unfair advantages over other market participants, and potentially disadvantaging order senders.

"That's slander!" O'Brien shot back. "You can't say that!" As for elitism, O'Brien observed that the NYSE has "more tiers than Yankee Stadium." The discussion took place at the Securities Industry and Financial Markets Association annual spring conference on market structure.

Brief Display

Behind the war of words was news that Nasdaq and BATS Exchange planned to introduce flash orders of their own. They subsequently did, and there are now four market centers that offer flash orders, including the CBOE Stock Exchange, which was first to conceive of this functionality for an equities market.

Flash orders are also called "step up" or "pre-routing display" orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue's participants and soliciting NBBO-priced responses. If there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

For more information on related topics, visit the following channels:

• Exchanges and ECNs