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January 1, 2013

Out of Order

By Tom Steinert-Threlkeld

This is an order that is allowed to "hide" out of sight on an order book when prices are locked or crossed. Such an order can "transform from a hidden order into a Protected Quotation at precisely the time a market (is) permitted to display an aggressive price," Bodek argued this fall in a series of articles on the Tabb Forum, an online discussion site.

The most well-known version of this came to be the Hide Not Slide order, from Direct Edge. This was used in a Wall Street Journal article featuring Bodek that portrayed how such an order could allow a hidden order placed by a high-speed trading firm to jump ahead in line of an institutional rival for the same order.

Such jumping allegedly occurs when the price of a given company's shares "lock" at an identical price on two different markets. The order at Direct Edge hides until the price slides. Then it becomes lit, at the original higher price. And the investor whose price slid, even a penny, gets a lower priority in getting what otherwise would have been the same order filled.

The charge that the hidden order gets to unfairly jump to the front of the line "has been at times misinformed," said William O'Brien, chief executive of Direct Edge.

"You don't want to reject a customer's order unless you absolutely have to," he told Traders Magazine.

The prohibition on locking the market at identical bid and offers on different exchanges or crossing markets, where the bid gets higher than the offer, means an exchange can't take process orders under those conditions.

"So when you get one that would" lock or cross a market, he said, "you have to decide what to do with it. Now, rejecting it is something you can do, and that's one option that we make available. But we try to give our customers other options," besides having it rejected.

But jumping to the head of the queue is not one of those options, he said. "It's a beautiful theory slayed by ugly facts," he said.

The first order has to be canceled. And the second order has to be at a higher price.

Then, the normal priorities of first to market with the highest price take effect.

"I mean, look, an exchange, by definition, has queue jumping all the time," he said. "I want to buy at 20, you want to buy at 20.01-you jumped the queue. Right? A Hide Not Slide order is simply someone willing to pay a better price. And so in certain circumstances, they have priority."

Even so, permutations that keep orders hidden until they suddenly light up can alter the basic purpose of markets to maintain a continuous market in stocks, said Selway. "The notion of price-time priority gets a little squirrelly," he maintained. "Do we really have a continuous price-time market when we have a large amount of hidden orders piled up, and then the price changes, boom, then we go?"


Moving Train

Over the long haul, the question boils down to this: Should there be more order types or fewer?

See Sidebar: Where to Find Them