Joe Ratterman, CEO of US equities exchange BATS, has said he would welcome further discussion around the use of controversial ‘flash’ order types, despite the fact that US regulator the Securities and Exchange Commission (SEC) has approved them.
The disputed order type, called BOLT in BATS’ case, allows unfilled orders to be held and displayed to members of a venue before being routed elsewhere. Some market participants, most notably NYSE Euronext, operator of the New York Stock Exchange, have been vocal in their opposition to such functionality, arguing that it flies in the face of Reg NMS, and in particular Rule 611 – better known as the order protection rule. The rule requires trading venues to route orders to market centres that display the best price on an “immediately and automatically accessible” basis.
The problem, suggests Ratterman, lies with the definition of ‘immediate’. “Does immediate mean three seconds, half a second, or 20 milliseconds?” he wrote in BATS’ latest newsletter. “Or should immediate mean execution against contra-orders already known at the exact moment of exposure?
For any period of time beyond a truly instantaneous moment, i.e. zero elapsed time, the functionality in question begins to raise potential concerns.”
While Ratterman stressed that the SEC deems the functionality of BOLT and its equivalents – Direct Edge’s Enhanced Liquidity Provider (ELP) programme and Nasdaq OMX’s Flash order type – to be fully compliant, he said BATS is willing to participate in an industry review of potential issues associated with the contentious order type.
As well as noting trading venues’ obligations to instantly route orders to market centres showing a better price, the BATS’ CEO admits that further investigation into the consequences of flash order types could explore their potential to create “two-tiered” market, where the best quotations from specific markets are only made available to a limited number of market participants, and inhibit price formation.
“The consolidated tape has long been the industry reference for the market’s top-of-book quotes,” wrote Ratterman. “It can be used as a benchmark for best execution, and it can be used as a basis for determining the national best bid and offer. In BOLT, Flash and ELP, “exposed orders” are not reflected in the consolidated tape, which might create a potentially harmful disconnect in the public quote stream over time.”