As Traders Magazine went to press, two of the nation’s 10 stock exchanges were not fully plugged into the National Market System.
Both the New York and Chicago stock exchanges were not routing to other marketplaces some of the orders they were prohibited from filling internally. Under the Securities and Exchange Commission’s Regulation NMS, exchanges must route away orders (or reject them) if better prices are available elsewhere.
Early last month, when Reg NMS’s trading phase commenced, the NYSE said it couldn’t route to the ISE Stock Exchange and three of the NASD’s Alternative Display Facility participants: LavaFlow, Track ECN and Direct Edge ECN.
The NYSE in early March appealed to the SEC for one-month “limited no-action relief” from the order protection rule. It received no public response from the regulator.
In mid-March it was not known whether the NYSE was trading through quotes in the four markets it couldn’t access, matching the national best bid or offer, or sending orders that could be filled on those markets back to customers unfilled. The NYSE declined to comment.
However, most large customers with smart-order routing were already accessing markets with the best prices directly, instead of relying on the New York to route out for them.
Prior to the trading phase, ITS did not offer connectivity to the ISE and the three ECNs that quote on the ADF. And the NYSE failed to establish linkages with those market centers or arrange for outbound routing to them. The New York subsequently said it would connect to those markets through private linkages by the end of March.
The Chicago Stock Exchange also did not meet the SEC’s deadline for quote-protection procedures by establishing linkages with other markets. However, the CHX said in February it would not trade through other markets and would cancel orders that could be executed at better prices on away markets.
The CHX intends to get outbound routing functionality through a broker such as Order Execution Services or Lava Trading, but has not yet finalized its plans.
