The New York Stock Exchange has filed additional information on its hybrid market with the U.S. Securities and Exchange Commission, clarifying the rules and functionality of the expanded NYSE Direct+ automatic order-execution service.
The supplemental filing details the rules governing automatic-execution orders, sweeps of the limit-order book, specialist and broker interest files and algorithms, and other features of the hybrid market such as “liquidity replenishment points”–the points at which the auction will have an opportunity to supply liquidity to dampen volatility. Also included are multiple specific examples on how orders will be handled under various trading scenarios.
“Blending the auction market with more automation reflects the exchanges commitment to our customers and further developing our market,” NYSE CEO John A. Thain said. “The hybrid market provides the most compelling array of choices for trading NYSE-listed securities and will allow us to better accommodate the diverse trading strategies of our customers.”
Bill Cline, head of Accentures Capital Markets practice, said, “Clearly the proposals around Direct +, especially with this clarification, go a long way toward meeting the primary concern of institutional traders, which is the lack of immediacy with NYSE trading.”
NYSE Direct+ provides order execution at high speed, intended to qualify the exchange as a “fast market” under new rules that the SEC is currently contemplating. Direct+ handles more than 10 percent of the exchanges average daily volume.
AL (auction limit) orders, a new electronic order type, will allow investors to electronically place limit orders that are exposed to the market for a short period of time in order to potentially receive a price better than the best bid or ask. Customers with buy and sell orders beyond the size of the best bid or offer will have the ability to “sweep the book” or designate individual orders to trade at multiple price points subject to certain limitations.
In order to preserve the lower volatility that characterizes trading on the NYSE, sweeps will be subject to specific limits called LRPs (Liquidity Replenishment Points). When activated, LRPs automatically convert the market from electronic to auction trading for one transaction.
In the hybrid market, floor brokers will be able to electronically represent large customer buy and sell orders at the point of sale. To assist specialists with market-making responsibilities and to maintain fair and orderly markets, proprietary software will allow specialists to automatically supplement liquidity in a fast market environment.
-Through Rule”> The NYSEs filing with the SEC contained 27 specific details of how trading would be handled under an expanded Direct+ program. The exchange appears to be doing what it can to allay concerns and build confidence in the hybrid market.
Good news for IT providers to the exchange: The existing system will require significant changes and enhancements that will take some time to deliver. According to industry insiders, the push toward an expansion of Direct+ is being welcomed by the industry, albeit with three key areas of comments.
The first area of comment involves the liquidity replenishment points. These are the points that are triggered by the formula wherein the specialist can step in and replenish liquidity. There are delays cited between 5 and 10 seconds when a LRP is invoked.
Accentures Cline said, “I think the challenge on this one is to rationalize these pauses and determine how frequently theyre likely to occur with the typical fluidity with which electronic trading occurs.” Cline said he thinks it sounds like specialists will receive automated tools so that they can replenish liquidity through an API rather than manually.
Another area that has garnered comment is the broker agency interest file. This is the provision that lets the floor brokers post orders outside the best price available that they, at their discretion, can choose to display along with the other orders.
“This provision will bring up questions about transparency,” Cline said. “I think the SECs Reg NMS proposals are designed to foster transparency, so the concept that there can be hidden orders with the floor brokers will generate comment.”
Opponents of the trade-through rule will be dismayed to learn that, despite all of the innovation underlying Direct+, there was renewed defense for the trade-through rule in the context of the new hybrid structure. Cline finds this clinging to the trade-through rule puzzling since the proposed changes to Direct+ will position the NYSE well to compete as a “fast market” on a level playing field with other electronic exchanges.
In February 2004, the exchange submitted its original SEC filing to expand the NYSE Direct+ service. A supplemental filing was issued in August. The NYSEs latest rule filing and related information are available here.