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January 1, 2013

Out of Order

By Tom Steinert-Threlkeld

"If everyone wants to stop competing, we can," said Isaacson, on the idea of putting a cap on the number of ways that orders can be placed. "But that doesn't seem like it's in the best interest of our markets."

Should there be a moratorium on order types?

Isaacson thinks not. "I think the train has left the station," he told the Security Traders Association.

The nation's oldest exchange even avers that it's false to lay the proliferation of order types at the root of the national exchanges' operating problems.

"To kind of pick order types and say that's the problem, we should fix that, is sort of a microscopic view of an ecosystem that is far more complex than any" single problem, said Joseph Mecane, executive vice president and co-head of the U.S. Listing and Cash Execution business of NYSE Euronext.

Even so, the SEC has never denied an order type submitted by an exchange, even if its review process can be "onerous," as Isaacson puts it.

The proliferation, Setzenfand contends, means that there should be some sort of centralized review body with explicit review criteria that determines whether a particular addition to the thousands of existing permutations gets approved.

"No rule should disadvantage a particular business model or give advantage to a particular business model," she said. "It needs to be a level playing field when it comes to creating order types."

The problem may resolve itself. "I don't think there are too many order types," said Ian Winer, director of equities trading at brokerage Wedbush Securities. "A lot of the dynamic, fast-type trading that was taking place a couple years ago has sort of been arbitraged out of the market by the law of diminishing returns as more players entered and drove down profits."

Profitability of high-frequency trading is plummeting, noted industry consultant Larry Tabb of the Tabb Group. In 2008, profits were $8 billion a year. For 2012, they were $1.8 billion.

And the volumes reflect this, Winer said. The volatility of markets in 2008 as the credit crisis erupted were ripe for exploitation by high-speed firms trading on small and large fluctuations in prices. Average volume on the top exchanges? It was 6.6 billion shares, according to the Securities Industry and Financial Markets Association. In 2012? Just 4.4 billion.

Perhaps so, but brokerages of all sizes and equities trading teams of all kinds at mutual funds and other institutional investing firms have it on their accounts to know and keep up with all the order types that do get approved.

The Nasdaq Stock Market, for one, provides what Blaugrund calls "a full test facility" where all existing or new order types can be tried out and checked, one weekend a month.

Tested or untested, "the ownership is on each trader and each institution to understand what is out there," said Setzenfand.

And deal with the thousands of order types that are out there. And still arriving.


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