Nasdaq defended its much-maligned plan for an options exchange that includes various dark order types. In a letter to the Securities and Exchange Commission last month, Nasdaq said it would maintain its “price-improving orders,” which have drawn heavy industry criticism.
However, in a slight nod to critics, Nasdaq said it would withdraw the pure non-displayed order type from its proposal.
Nasdaq had planned to launch the Nasdaq Options Market in early December. Those plans were put on hold since the SEC did not rule on Nasdaq’s proposal in time. The SEC has given no indication of when it might rule on Nasdaq’s proposal.
Nasdaq’s proposal for the Nasdaq Options Market includes several types of dark order types. The price-improving orders–the most controversial of its new order types–would enable participants to submit penny-priced orders in options quoted in nickel and dime increments. Those orders would be held on Nasdaq’s book, available for execution, but would be disseminated to the market at the allowable increment.
This order type generated a bonanza of industry criticism. Citadel told the SEC in mid-2007 that Nasdaq’s proposal represented “an end-run around the penny pilot.”
In its December letter, Nasdaq replied to criticism from Citadel and the International Securities Exchange that its price-improving orders would violate the SEC’s Rule 601, or firm quote rule, and encourage internalization and gaming. The American and Philadelphia stock exchanges have also publicly criticized Nasdaq’s plans in industry forums.
“Like the auction market, the Price Improving Order provides brokers with the opportunity to improve their customer’s execution by finding the non-displayed trading interest that exists between the spread,” Nasdaq told the SEC. “The benefit to investors created by the opportunity for price improvement far outweighs any perceived harm from the non-display of the true price of the Price Improving Order.”
