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January 1, 2013

Out of Order

By Tom Steinert-Threlkeld

That can seem at odds with the rules. "Shouldn't it really just route to the best bid and offer that is out there? Shouldn't that be the default?" said the head of trading at a major institutional trading firm, with nearly a trillion dollars under management.

"If we're going to have a national market system, shouldn't all these venues be routing to the best bid and offer for the customer's execution? Why are they pricing it to keep it at that venue?" said the trader, who insisted on anonymity, to keep trading on all venues with all participants.

Nasdaq also has a Supplemental Order type that "only interacts with small orders to avoid interacting with the price-clearing orders," the trader contended.

"What the hell is that about? If I go in there with an order to take out the offer, why aren't I getting everything that is actually offered there? That doesn't do anybody any good."

That order type, by Nasdaq's wording, "provides a final chance for routable orders to execute on Nasdaq, before being routed away" and for suppliers of liquidity "to interact with attractive order flow." The orders "execute only against orders smaller than the size of the supplemental order interest."

Much of the problem of proliferation centers around the fact that, even if the process of getting new order types is "onerous," as Isaacson put it, the number of order types keeps rising inexorably. Figuring out how each works defies the ability of the human brain to absorb, evaluate and adapt.

That's why the STA's Setzenfand says, "We would like to see a better notification process for order type filings and inclusion of examples of how order types impact time and price priority."

To that end, Nasdaq OMX Group has tried to turn the proliferation of order types from an inexplicable morass into a learning opportunity for its members.

And a potential competitive advantage.

While BATS, the NYSE and Direct Edge kept introducing new order types, Nasdaq OMX in November started to explain how each of its 10 main ways of putting in buy and sell orders worked.

The exchange operator began circulating to its members an interactive rundown on how its order types work, assuring them that they can't be used by any market participant to jump ahead in the queue for striking a transaction.

The combination of audio descriptions with summaries and examples on slides, in synchronized chapters, was sent by email to head traders, technology contacts, compliance officers and executives of member firms. Traders Magazine obtained a copy.

The automated presentation was an attempt to educate members and investors on the workings of order types and how public bids and offers interact with hidden orders not shown on lit or "displayed" markets.

The presentation itself, narrated by Michael Blaugrund, a vice president of Nasdaq OMX transaction services in the United States, made no recommendations on how to best use order types.

But he and Nasdaq specifically note that "there are no order types that offer queue spot privilege or queue jumping," a reference to concerns that some "hidden" orders can jump to the head of the line, when a trigger turns them into publicly displayed quotes.