The Securities and Exchange Commission Friday disapproved a plan by the Nasdaq Stock Market to create “benchmark” orders that would compete with services offered by broker-dealers.
The regulator’s Division of Trading and Markets found that the plan, proposed in May, was not consistent with national securities exchange rules designed “to protect investors and the public interest, and not to permit unfair discrimination between customers, issuers, brokers, or dealers” and rules not to “impose any burden on competition not necessary.’’
Under the plan, the Nasdaq Stock Market proposed to offert its members three “benchmark” order types that would allow customers to manage large orders by generating series of “child orders’’ to try and hit desired results during a trading day. The end result would achieve one of three common trading benchmarks in a specific stock, for a given period: the Volume Weighted Average Price (“VWAP”), the Time Weighted Average Price (“TWAP”), or a Percent of Volume (“POV”) for that stock.9
The splitting of parent orders into child orders, as is typical with high-frequency trading, would offer Nasdaq’s “members the ability to enter a single order in a single security seeking to match the performance of a selected benchmark over a pre-determined period of time,’’ Nasdaq said in its original with the SEC.
The execution of the orders would be handled by a software application created by Nasdaq. The commission said it expressed concern that such child orders “would be generated solely by the Application and presumably outside the control and supervision of the broker-dealer firm that entered the initial Benchmark Order.”
In the disapproval notice, SEC deputy secretary Kevin M. O’Neill said the commission was concerned whether the child orders “would be subject to adequate pre-trade risk checks” and noted that the proposal did not indicate ‘how or whether pre-trade controls would be applied to Child Orders generated by the Application.”
Nasdaq declined comment on whether it plans to appeal the SEC’s decision.
Last fall, the Securities Industry and Financial Markets Association said it opposed the Nasdaq plan.
In a letter to the SEC, SIFMA, which represents institutional brokers among others, told the regulator it was concerned about a national securities exchange offering a service that competes with similar services provided by broker-dealers.
Institutional brokers have been offering benchmark algorithms for years.
SIFMA contended that Nasdaq might get regulatory advantages over brokers that provide the same service.
In May, Eric Noll, executive vice president of Transaction Services U.S. and U.K. at the Nasdaq OMX Group, said, “The most interesting thing I think we’re doing this year is the introduction of what we call benchmark orders.”
He said:
“So when we think about the way we run our business and how it grows, what we do I think best is provide low-cost, effective, transparent solutions in what is becoming commodity spaces. So we take businesses that have been innovated elsewhere and we provide that low-cost, highly efficient, highly transparent solution to the larger marketplace. We think algos and algo executions belong in that bucket.”
In particular, Noll said, “we think VWAP, TWAP, and percent of volume strategies have become relatively commoditized in the algo space. So what we intend to do is offer those as order types on our exchange.”
