Are there really 2,000 exchange order types!?
Buyside traders fret about a lot of things. In the past year, they added the ever-expanding universe of exchange order types to their lists of worries.
Theres an order type a minute being created, Jennifer Setzenfand, an institutional trader and former chairman of the Security Traders Association, told Traders Magazine earlier this year.
See Also:SEC Eyes Order Type Development
The buyside has two complaints about order types. First, their sheer number adds undue complexity to the market. Second, some of them can be used by proprietary traders and market makers to the disadvantage of everyone else.
So how many are there? Apparently, it depends on the definition of order type.
BAT Holdings, operator of two stock exchanges, conducted an internal review and found it had at least 2,000 unique order type combinations.
Rosenblatt Securities, on the other hand, spent four months researching documents from all the industrys exchanges and declared there to be only 252 order types. And those were based on only 36 archetypes, according to the brokers 56-page report. (BATS recently told Traders Magazine it had only 15 “basic” order types.)
Rosenblatt concluded there was no conspiracy between exchanges and professional traders to create order types that hurt the buyside. But it did state that the proliferation of order types added to the complexities of the marketplace and that undoubtedly creates opportunities for the savviest market participants.
The exchanges say that they create new order types in response to customer demand. They note that all changes are made public through the regulatory process so must first be vetted by the Securities and Exchange Commission.
They are not adding new ones onto their rosters surreptitiously, they emphasize.
The various order types allow people to trade in different ways in different time frames with different objectives, BATS chief operating officer Chris Isaacson told Traders Magazine.
Driving the plethora of order types is good old-fashioned competition. To keep a large customer happy, the exchange operators will devise an order type just for him.
Theyll ask a firm what it needs, said David Polen, an executive with vendor Fidessa Group, and hear: Well, if you tweak the infield fly rule, it will help my team. You say, Oh, OK, you know what? Ill tweak the infield fly rule. I want you to play in my stadium.
That process may be repeated several times with several different customers, Polen added.
Despite the chorus of complaints, the exchange operators have made no effort to cut back on the number of order types. Actually, they are still adding to the list.
As Trading Magazine was going to press, the New York Stock Exchange was proposing two new order types, the Institutional Liquidity Order and the Oversize Liquidity Order.
Presumably, these will appeal to the buyside, as they are intended to facilitate block trading.
Still, the buyside is vexed, so it recently asked the SEC to get involved. A group of traders from 37 buyside desks worked with brokers Bloomberg Tradebook to write a petition asking the SEC-among other things-to force the exchanges to be more forthcoming about their order matching processes.
For their part, the exchanges have taken steps to better clarify the complexities of their order types. Both Nasdaq OMX Group and Direct Edge have created audiovisual presentations for their websites that do just that.
