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January 1, 2013

Out of Order

New Ways to Buy and Sell Shares on Exchanges Are Arriving Daily. Are Controls Needed on Choice, Complexity and Competition?

By Tom Steinert-Threlkeld

Over the past two years, BATS Global Markets conducted a study of how many "unique order type combinations" can be used to set buy or sell instructions on its two national exchanges in the United States.


There are at least 2,000, according to the seven-and-a-half-year-old challenger to the New York Stock Exchange. There are likely similar amounts of permutations now on the Nasdaq Stock Market, the four-decade-old pioneer of the all- electronic market, and exchanges operated by Direct Edge, which started out 14 years ago as an "electronic communications network."

Market orders.

Limit orders.

Orders that allow investors to publicly display blocks of shares for sale, but keep in "reserve" a portion of the order, hidden from view.

Orders that stay hidden, altogether, until the value of a stock that has been frozen or "locked" by identical bid and offer prices-which is prohibited-has been resolved.

Orders that "sweep" all markets for the best prices.

Orders that look for prices only in venues that have costs of transaction or offer rebates.

Orders that expire after a given length of time.

Orders that are set to execute at one tick inside the best bid available anywhere.

And so on and on and on.

Can there be too many order types? Maybe, maybe not.

See Sidebar: Order Types

But the number of order types and the almost limitless permutations in the way they can be used to buy or sell shares add undue complexity to trading, according to a wide swath of buyside and sellside traders. Their sheer volume and the multiplicity of ways they can be used across not just one, but every, national exchange makes keeping up with how markets work a serious challenge. And it makes many institutional traders suspect that, somehow, they're being taken advantage of by high-speed trading and market-making firms that propose the greatest number of new ways to get to the front of the line in markets, based on displaying the best price before anyone else does.

Jennifer Setzenfand, STA

"There's an order type a minute being created," said Jennifer Setzenfand, outgoing chairman of the Security Traders Association, which represents 4,200 individuals involved in trading equities and equity options.

"There are perfectly good order types that add liquidity to our markets," said Setzenfand. "And there are predatory order types that some may argue also add liquidity, but get in the way of institutional orders."