The Problem With Too Many Order Types

The stock market is unnecessarily complex and the thousands of exchange order types are partly to blame.

That was a recurring frustration of industry professionals expressed during two weeks of conferences and hearings on the inner workings of markets, held in Washington and New York during September and October.

“We have way too many order types,” Chris Concannon, a partner at market maker Virtu Financial, and a former Nasdaq OMX transaction services executive, said at a Senate hearing in September.

The culprit, in the pros’ minds: Regulation National Market System, which requires traders to carry out transactions at the lowest available price across a proliferating number of exchanges and trading venues.

Before Reg NMS, which went into effect in 2007, there were no more than a dozen order types, including market orders, limit orders, time-in-force orders, stop-loss orders, all-or-none orders, and those associated with short selling.

That number has swelled into the thousands, practitioners say. BATS Global Markets alone lists over 2,000, Chris Isaacson, BATS’ chief operating officer told attendees at the Security Traders Association’s annual conference in Washington, D.C,., in September.

Despite the large numbers, all those order types are justified, trading officials say, because they help exchanges comply with federal regulations and route orders to other market centers.

“The vast majority of order types are related to routing strategies,” Isaacson also said at the Securities and Exchange Commission’s roundtable on market technology last month. “That’s exchanges routing to each other.”

Still, their necessity hasn’t stilled the complaints or the calls to limit their numbers. At a market structure conference sponsored by Georgetown University in September, there was a call for a moratorium on new order types.

The criticism surrounding the order type explosion is of two types. First, they add undue complexity to the marketplace. Second, they may give speculators and professional traders an advantage over institutions and their brokers. The criticism: more active traders get access to hidden orders and order types designed to specifically benefit high-speed systems.


“We wonder why someone is trying to make things more complex,” Andy Brooks, head of U.S. equity trading at T. Rowe Price, said at the Senate Banking Committee hearing. “Why do we need so many ways to express trading interest? Is there something else going on? It’s a question that is troubling and we’re not sure what the answers are.”

The myriad of order types don’t just bother traders, they also concern trading technologists. That became clear during a roundtable on market technology hosted by the Securities and Exchange Commission last month.

Held in the wake of this summer’s Knight Capital Group flood of erroneous orders, the regulator used the roundtable to probe operations and technology executives about the problems inherent in developing, testing and deploying the software that underpins the stock market.

“In isolation, most of these order types make sense,” Sudhanshu Arya, global head of liquidity management technology at the brokerage Investment Technology Group, told the SEC. “But the whole suite of order types actually presents a pretty huge challenge for us to actually test through.”

Arya recommended that the burgeoning variety of order types come under some sort of review. That review would examine the amount of volume each one handles and the actual utility of an individual order type.