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July 6, 2009

Bring It On

Differences of opinion at Wall Street conferences are not uncommon. That's what good conference programmers aim for. But heated confrontation is actually pretty rare. At the SIFMA market structure conference in May, one exchange official and another from an ECN went at it tooth and nail. The protagonists in the brouhaha were Larry Leibowitz of NYSE Euronext and Bill O'Brien of the ECN Direct Edge. The issue was Direct Edge's flash order type, which essentially seeks out private liquidity providers for the contra side before routing the order to the national best bid or offer.

Michael Scotti, Editor

This issue's cover story takes an in-depth look at these "flash" orders. Nina Mehta, our senior editor, goes under the hood and shows why this order type truly is a flashpoint. Mehta explains its importance: "The flash order type opens the door on a number of bigger discussions taking place in the equities market, including the meaningfulness of the NBBO, competition between market centers, the rules at dark pools and the definition of a quote."

The problem for some, and likely for the SEC, is that limit orders sit in the public market with a lesser chance of getting a quick execution. Limit orders are good for the market, but it seems no one these days is keen on posting their intentions--neither institutions nor brokers. Of course, limit orders going unexecuted is not new. Back in the days when the NYSE ran an auction, led by the specialist, floor brokers had the opportunity to step ahead of limit orders when an incoming order was "flashed" to the crowd. That was the beauty of the auction, said defenders of the floor. Institutions, on the other hand, were not big fans.

Reg NMS, of course, was partly designed to protect limit orders and encourage their use. Limit orders aid transparency--a topic that appears to be gaining in importance at the SEC, as the equities market becomes more opaque, or dark. You'll also notice a story on the SEC's concerns about dark pools in our Rules & Regs section. James Brigagliano, the co-acting director of the SEC's Division of Trading and Markets, was at the same SIFMA conference, expressing his concerns about price discovery, liquidity and volatility. So was SEC associate director David Shillman.

Market structure debate is intense now. And a former SEC colleague of Brigagliano and Shillman now in private practice found himself in the position of having to moderate the panel and exchange between Leibowitz and O'Brien. Robert Colby, the former deputy director and veteran of untold panels, interjected during one fiery exchange between the two: "We supplied guns in case it gets better." The comment diffused the combatants only somewhat, but it definitely brought down the house.


Michael Scotti

Editorial Director


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