BATS Exchange has changed its operating rules to preclude orders on its market from trading through protected quotes, to other markets, when prices are sliding.
The market center, run by BATS Global Markets, put into immediate effect a “noncontroversial” rule change that modifies the operation of the Exchange’s price sliding functionality on both the BATS equity securities trading platform and the BATS equity options trading platform , BATS Options.
Price sliding, in some cases, allows orders to be repriced at more aggressive prices when the national best bid or offer changes. And at times, the orders would trade through to another market center, when an order might lock or cross a protected quote at its trading center.
In the modification that BATS filed with the Securities and Exchange Commission, a price-sliding order would be handled with less “aggression,’’ to avoid trading through a protected quote.
Where before an order would get re-ranked and re-displayed at a more aggressive price, as the best bid or offer changed, BATS said it will now “re-rank an order at the same price as the displayed price (i.e., a less aggressive price) in the event such order’s displayed price is locked or crossed by a Protected Quotation of an external market.”
The effect being that a hidden order, then, would not trade through a public quote to another market center, when prices get locked with those at the original center.
Here’s how this will work:
Assume the Exchange has a posted and displayed bid to buy 100 shares of a security priced at $10.10 per share and a posted and displayed offer to sell 100 shares at $10.13 per share. At the moment, the best bid is $10.10 and the best offer is $10.12.
If the Exchange receives a non-routable bid to buy 100 shares at $10.12 per share, the Exchange will rank the order to buy at $10.12 and display the order at $10.11 because displaying the bid at $10.12 would lock an external market’s Protected Offer to sell for $10.12.
If the other market updates its protected offer to sell, the ranking approach would also update, to protect against locking or crossing of quotes.
The approach will help deal with price discrepancies, BATS said in its filing, and will not change the priority of an order at its displayed price.
The process “unslides the order so that it is displayed at the locking price” only when “such display becomes permissible,’’ it said.
Last year, price sliding orders came under criticism for allowing hidden orders to seemingly jump ahead of protected quotes, to get filled on other markets, when locking occurred.