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January 1, 2013

Out of Order

By Tom Steinert-Threlkeld

"A natural thing that starts occurring is, you start talking to your clients, and you start saying to them, 'How can I help you?'" said David Polen, head of business development for Fidessa Group, which supplies trading systems and market data services to both buyside and sellside customers. "And they say, 'Well, if you tweak the infield fly rule, it would help my team.' You say, 'Oh, OK, you know what? I'll tweak the infield fly rule. I want you to play in my stadium.'"

But the process doesn't stop with one tweak of the infield fly rule. If you have eight different clients, you can end up with eight different versions of the rules, since, Polen said, "each one of them has a slightly different idea of what they want.

"And you know what?" he said. "It's easy for you to do," using the flexible trading systems now in use.

In this case, Direct Edge made it clear this order type was aimed at one type of customer: market makers.

Nothing necessarily nefarious there. This, the exchange operator said, is a one-sided order.

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"As a result, a member acting as a market maker would need to submit and maintain continuously both a bid and an offer using the order type," it said. That is to comply with the exchange's quotation requirements for market makers.

And the operator even added branding to the lure of the order type. Market makers who place "attributed quotes" with this order type could identify themselves, noted Bryan Christian, head of sales at Direct Edge. That means a market maker can use attribution as a tool for advertising that a particular order is its quote.

This helps members "make more educated trading decisions," the exchange says.

The New York Stock Exchange makes the explicit point that none of its order types are aimed at a specific type of trading firm and all are marketed to its membership as a whole. Nasdaq takes much the same stance, and BATS says it won't pursue any order type if there isn't wide interest in it.

"We take ideas for functionality from the broad base of our membership," Isaacson told Traders Magazine, "and we filter those through our own view of the market and what is fair and orderly. Clearly, if an order type comes through purely for the self-interest of (one) customer, we're not going to allow it."

In 2012, BATS introduced a pricing incentive for orders, called NBBO Setter, that was aimed at market makers.

But in this case, it says, the beneficiaries were all investors.

BATS gives "a slightly higher rebate to someone who's making markets on BATS, and they set the NBBO," Isaacson said. This encourages market makers to (1) improve the price that's available to the entire public, and (2) do it on a BATS exchange.

The self-interest of exchanges can come into play. The Nasdaq Stock Market, for instance, has a "price to comply" order type that makes sure any order complies with the SEC's National Market System rules. But the order type is designed to keep the order on Nasdaq and not end up elsewhere.