Courtesy of Sal Arnuk of Themis Trading
Die Hard: NASDAQ – Extended-life Order Type?
NASDAQ was an outspoken critic against IEX’s plans to become a stock exchange. They lobbied the SEC hard, and warned of lawsuits and competing speedbumps/complexity, should the SEC approve IEX’s exchange application. The SEC did approve IEX. NASDAQ and the other exchanges and prop trading firms invested in speed-oriented modern market structure were not pleased.
This morning, we share with you a WSJ article that describes NASDAQ’s plans to introduce an investor friendly “extended-life” order type. This proposed order type, unfiled with the SEC as of yet, would allow orders that remain live for at least one second to jump ahead of orders at the same price that do not. Investors who use such an order type would not have to worry about competing with speedy HFT’s to get to the top of the queue, according to CEO Robert Greifeld. Greifeld also hinted at additional innovations, as “IEX’s unique model compelled NASDAQ to respond with a multiphase plan”.
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What Are the Implications of a New NASDAQ Extended-Life Order Type?
That NASDAQ might introduce an order type that would de-emphasize speed, and allow “investors” to jump ahead in the queue of pesky quote flickering HFTs does indeed sound investor friendly! However, history has taught us to wait for the details.
After all, NASDAQ does not have a history of implementing change that even they believe is good for the markets in whole. You might remember that NASDAQ implemented the flash order, even though they publicly declared it to be bad for markets, because Direct Edge implemented it, and NASDAQ was losing market share. You might also recall NASDAQ’s hidden orders as not being so hidden, or investor-friendly, after all.
We would be curious to see if such an order type would stick out on a direct pricing feed pre-trade with an identifier, or if it would be stick out in any way actually.
We would also be curious to see if NASDAQ floated the idea of such an order type, and solicited input on how it might work, from high speed trading clients – like Hudson River Trading for example.
It might very well be the case that high speed trading firms feel that they can make more money trading alongside of easily-identifiable elephants, and still racing to penny-jump a tick ahead of such an order, instead of racing to be at the top of the queue at the same price. It might very well be the case that we all might see volatility increase, and spreads widen, as a result of such an order type, which might be desirable for a high speed trading firm.
It might be the case that such an order type might not de-emphasize speed after all, but still keep the arms race alive!
NASDAQ stock has been doing quite well over the last few years; if you haven’t looked recently, its trading at an all-time high:
NASDAQ’s business success is largely attributable to non-transaction based revenue and income. Although its trading market share is declining, its Information Services and Technology Solutions segments (together over half its revenue) have been on fire. Translation -> Selling Speed is Good Business!
We are skeptical that NASDAQ will in fact, when all the details are laid out, jeapordize those growing business segments with a product that allegedly, on the surface, demphasizes speed.
Besides, while an investor or long-term money manager might like the idea of being at the top of a queue with an “extended-life” 1-second minimum order, that investor still has to access the exchanges via a broker. And brokers may not share their enthusiasm to enter such order types on their behalf. In fact, Ex-NASDAQ executive Eric Knoll (current agency broker Convergex CEO) had this to say just this weekend in the Financial Times:
“If they [IEX] are only sharing the best price they are going to be last on the order routing queue because it will be expensive to trade on them,” says Eric Noll, chief executive of Convergex, an agency broker and member of IEX’s quality of markets committee. “I am going to go to other places where I get a rebate or where speed matters and I don’t want to be slowed down by the 350-microsecond delay.”
So, I guess we will all wait and see. Sometimes, something sounds great on the surface, but proves to be less than great when the details are released.
Some habits, like being addicted to speed, may very well die hard.
