Nasdaq OMX Group has formally requested permission to change the algorithm that matches orders on its PSX exchange so that it prioritizes the time at which an order arrives instead of the size of the order.
If approved by the Securities and Exchange Commission, the change will end a “marginally successful’’ experiment that began in September 2010 to create a “price-size exchange” that would favor larger orders over smaller ones and limit the emphasis on systems that deliver orders to markets faster than any others.
Under the Order Processing Algorithm currently in use “better priced orders” are executed first, then matches are allocated in proportion to the size of a publicly displayed order.
In the changeover, Nasdaq OMX is proposing an algorithm that is “substantively identical” to those in effect at its Nasdaq Stock Market and its sister BX exchange. In those cases, the algorithm executeds better-priced orders first and, in prioritizing any equally priced orders, the first to arrive.
Ten days ago, Nasdaq OMX Group said it plans to re-launch its PSX exchange as a “better trading venue” for exchange-traded funds, notes and other related products, as early as next month.
The exchange is to execute trades in all National Market System securities, but will give special incentives to retail and institutional investors to participate as well as special benefits to firms that register as market makers, committing to make continuous two-sided quotes on exchange-traded products.
The start date has now been pushed back to some time in the second quarter. The SEC is seeking public comments on Nasdaq’s plan to change its algorithm from one that favors price then size of an order, to one that favors price then time of arrival.
In seeking to change the priorities in the algorithm that matches orders on PSX, Nasdaq told the SEC “the price/size execution model has been only marginally successful in garnering market share, primarily due to the risk of a large execution at a stale price that a market participant would face if unable to adjust the prices of its posted orders quickly. “
Nasdaq said the PSX also is proposing to introduce midpoint peg post-only orders, and price to comply post orders; to adjust the operation of minimum quantity orders and post-only orders; and to eliminate minimum life orders.
