NYSE Arca, in the wake of trading mishaps that caused the cancellations of thousands of trades on Sept. 19, is introducing a new service that could slow down trading and avoid a repeat of that disastrous day.
The unit of NYSE Euronext has started to incorporate its competitors’ depth-of-book data into its own depth-of-book feed. That will allow it to route orders to more price levels than is required by Regulation NMS.
That Securities and Exchange Commission rule requires market centers to route unfilled orders to their competitors. But they only need to route to the markets’ best prices.
Under the Arca initiative, the exchange will also route to the second-best, third-best, etc., prices. That will give the competing markets a chance to refresh their top-of-book prices, thereby preventing customers from executing at wildly different top-of-book prices.
That’s what happened on Sept. 19, when extreme volatility caused orders to execute at “erroneous” prices on the electronic markets. Tens of thousands of trades had to be cancelled by Arca, Nasdaq and others.
The problem, Paul Adcock, a NYSE Euronext executive vice president responsible for Arca operations, told Traders Magazine, is that prices can’t be refreshed as fast as orders are routed. So traders don’t get accurately priced fills.
Arca’s plan will cost it in lost volume, according to Adcock. But “this is the right way to go,” he said. “After going through what happened on that Friday … It’s probably not an anomaly anymore. If so, how do you slow the world down? I’m making my systems faster and faster.”
As an example, assume a competitor’s best bid is $10 and the offer is $11. A buy order sent outbound by Arca would trade against the $11 and then whatever prices existed above that. That would give exchanges time to refresh their top-of-book quotes back to $11, which the order would then hit. That lessens the risk of orders trading at top-of-book prices far removed from $11.
Adcock has already incorporated depth-of-book feeds of two competitors. He expects to incorporate all exchanges and ECNs by the end of next week, he said.
