Flash Orders Not Used by Institutional Brokers
Traders Magazine Online News, August 3, 2009
In June Direct Edge's Enhanced Liquidity Provider (flash) program accounted for 1.45 percentage points of the ECN's matched market share of 11.89 percent. BATS's June market share was 10.72 percent, with 1.25 points coming from its BOLT, or flash, executions. Nasdaq did not release information about how much its flash executions contributed to its June market share. July figures are not yet available.
William O'Brien, Direct Edge's CEO, noted that the potential benefits of flash order types for customers is price improvement and size improvement. He said his ECN's ELP program, which is optional for participants, is used by a mix of retail and institutional brokerages. He declined to say how much price or size improvement ELP executions receive on average. Direct Edge is owned by a consortium that includes the International Securities Exchange and four broker-dealers. BATS Global Markets, which runs BATS Exchange, is owned by 11 broker-dealers.
TD Ameritrade is one of many retail brokerages that use flash orders. Retail brokers typically have smaller-size orders that are less likely to suffer slippage than block-size institutional orders being worked in the market through algorithms or direct-market-access tools.
Christopher Nagy, head of order routing, sales and strategy at the retail brokerage giant, noted that although "seeds of doubt have been cast in retail minds," TD Ameritrade sees clear benefits from using flash orders. "We view our obligation to protect clients by getting them the best possible prices in the market very, very seriously," he said. "We have seen and continue to see excellent results for our clients using flash orders."
TD Ameritrade looks at slippage, price improvement and price disimprovement statistics to gauge execution quality with flash orders. "We see flash orders getting dynamic pricing at the inside [market]," Nagy said. He added that customers whose flash orders get executed may also avoid the potential time delay in routing the order to another market center and possibly missing that quote. His firm has used Direct Edge's ELP program since 2006.
For brokers working institutional orders, however, flash orders raise leakage concerns. Jamie Selway, managing director at White Cap Trading, an institutional agency broker, said his firm doesn't use flash orders to execute orders. While he believes these order types conflict with the existing requirement for a market center to display its best quotes and should not be permitted by regulators, he thinks they should be an option for customers that might want to use them for as long as they are allowed by the SEC.
In a letter emailed to customers this morning, Bob Gasser, chief executive of agency broker ITG Inc., told clients his firm wasn't using flash orders on any market centers. "ITG does not engage in 'flash' order activity on behalf of our clients," Gasser wrote. "We prefer to control order execution much more precisely by directly accessing the quotes displayed by each market."
Jefferies' Suryawanshi raised another issue for institutions. Buyside firms, he suggested, should take care to avoid unwittingly having their orders flashed when using DMA tools. "Straight DMA orders are now getting risky because there's a lot visible on feeds that wasn't visible before," he said. Suryawanshi added that using an immediate-or-cancel order "to dig through hidden liquidity" is no longer effective in all markets. "If 1,000 shares of a stock are displayed and the trader sends an IOC order for 5,000 shares that gets flashed, the residual 4,000 could now be exposed on the data feed," he said.
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