There is no conspiracy between exchanges and professional traders to create order types that work to the disadvantage of the buyside.
That’s the conclusion of the authors of an exhaustive study of exchange order types conducted by Rosenblatt Securities. Despite concerns to the contrary, the researchers found no basis for alarm.
“We’ve been critical of some functionality,” authors Andrew Upward and Justin Schack state, “but we find no evidence that exchanges or automated proprietary traders have conspired to create “killer” order types that disadvantage end investors, as some critics have contended.”
The study concluded that the 252 order types offered by the 13 stock exchanges were a natural outgrowth of an “unevenly regulated” electronic market. But they did not incorporate any “egregious” advantages to professional traders. Certain order types offered by the New York Stock Exchange do offer its designated market makers advantages, but those have been “expressly blessed by the regulators.”
Rosenblatt spent four months digging into exchange documents to determine the number of order types, how they function, and if they conferred advantages on any one user. The brokerage classified the order types into four groups in its 56-page report.
It undertook the study in response to concern swirling in the institutional trading community that a proliferation of “thousands” of order types had made the marketplace too complex and placed buyside traders at a disadvantage.
It concluded that there are only 252 available order types and that those are based on only 36 archetypes.
Rosenblatt did conclude that the proliferation of order types had indeed added to the complexities of the marketplace and that “undoubtedly creates opportunities for the savviest market participants.” The broker urged buyside traders to bone up on their order types.
