August 19, 2014
SR-EDGX-2014-18
34-72676 Jul. 25, 2014 Notice of Filing of Proposed Rule Change Relating to Include Additional Specificity within Rule 1.5 and Chapter XI Regarding Current System Functionality Including the Operation of
Order Types and Order Instructions
Comments due: August 21, 2014
dodd frank principles:
Markets should be transparent.
Regulation should be consistent, without gaps that can be exploited by those who wish to indulge in risky, destabilizing or illegal behavior.
Market participants, not taxpayers, should bear the risks of their market activities.
And regulators should have the willingness and the tools they need to apply these principles to the day-to-day workings of the financial markets.
The Dodd-Frank Act translated these principles into law that is the foundation for effective regulation.
http://blogs.law.harvard.edu/corpgov/2012/11/16/dodd-frank-principles-and-provisions/
these principles are violated by this rule filing in a rather wholesale manner.
the exchange appears to decrease the order types by reclassifying order types into "instructions". further, without these practices being authorized, these practices continue to be in operation today. apparently the exchange believes that drafting a rule proposal describing their practices generally will alleviate any concern by regulators.
ATTRIBUTABLE AND NON-ATTRIBUTABLE (RULE 11.6(A))
The Exchange currently defines the terms “Attributable Order” and “Non-Attributable Order” in Exchange Rules 11.5(c)(18) and (19). An Attributable Order is currently defined as “[a]n order designated for display (price and size) that includes the Member's market participant identifier (“MPID”).” A Non-Attributable Order is currently defined as “[a]n order designated for display (price and size) on an anonymous basis by the System.” The Exchange believes that a User choosing whether to display its MPID on an order they submit to the Exchange is more characteristic of an instruction, rather than an order type. Therefore, the Exchange proposes to keep this definition but delete the word Order from both terms, leaving just the terms Attributable and Non-Attributable. As part of its order type clarification, the Exchange proposes to relocate each term to proposed Rule 11.6. The Exchange does not propose to alter the meaning of either term. The Exchange, however, proposes to add additional specificity to the rule regarding the designation of orders as
Attributable and Non-Attributable. Specifically, the Exchange proposes to state that unless the User elects
otherwise, all orders will be automatically defaulted by the System to Non-Attributable. Further, a User may
elect an order to be Attributable on an order-by-order basis or instruct the Exchange to default all its
orders as Attributable on a port-by-port basis. However, if a User instructs the Exchange to default all its
orders as Attributable on a particular port, such User would not be able to designate any order from that
port as Non-Attributable. Where a User includes an Attributable instruction with an order, the User's MPID
will be visible via the Exchange's Book Feed. (17) Conversely, if an order is to be Non-Attributable, the User's MPID will not be visible via the Exchange's Book Feed.
i disagree that there should be any non-attributable orders. regulators should have readily available information and non-attributable order makes an audit trail more difficult. the exchange seeks to make non-
attributable as the default? the exchange failed to include a paragraph about how this improves the
investor's experience. why would any user want to be anonymous? we can only speculate. perhaps someone should review the original rule filing of the non-attributable order so that we can see how this benefits the public markets.
CANCEL BACK (RULE 11.6(B))
Under current Exchange Rule 11.5(c)(4), a User may opt not to use any re-pricing (18) instructions if display of the User's order by the System on the EDGX Book at its limit price would violate Regulation NMS, Regulation SHO, or the National Market System Plan, also known as Limit Up/Limit Down (“LULD”), to address
extraordinary market volatility (the “LULD Plan”) (19) at the time of receipt by the System. In such a case,
the System cancels the order back to the User. The Exchange proposes to add a new defined term “Cancel Back”
to its rules to specifically describe this instruction. The Exchange proposes to define Cancel Back as an
instruction the User may attach to an order instructing the System to cancel the order, when, if displayed by
the System on the EDGX Book at the time of entry, or upon return to the System after being routed away, the
order would create a violation of Rule 610(d) of Regulation NMS, Rule 201 of Regulation SHO, or the order
cannototherwise be executed or posted by the System to the EDGX Book at its limit price upon entry. The
Cancel Back instruction is not currently defined in the rules, but is currently available in the System. This
proposed addition merely codifies the existing ability of a User to request that an order be cancelled if it
would violate Regulation NMS, Regulation SHO, or the LULD Plan if it was displayed by the System on the EDGX
Book at its limit price, upon entry.
i think market participants should be responsible for submitting and maintaining legal orders. i don't think
they need a cancel back order instruction. this paragraph describes the contingency but i am not convinced
that the additional function is necessary. could the use of this function remove liquidity in times of
stress? yes, i think it might but this might not be a desirable circumstance. while this might alleviate the
stress of a marketmaker or broker, this would probably not be the right thing for the investors. i have an
idea: the order types and functionalities should be the same for marketmakers, brokers and the retail
investors.
i have never liked the limit up/limit down plan. i think the SEC is trying to cure volatility painlessly.
much of the volatility is caused by shortselling into the bid until the demand is exhausted and the price
collapses. if the SEC wishes to cure the situation, perhaps they should revisit shortselling into the bid.
the experiment has failed and the cure has not repaired it. maybe the industry should come up with another
idea so that the regulators can protect the shortselling in the market and make the retail investors pay.
DISCRETIONARY RANGE (RULE 11.6(D))
The Exchange currently defines a “Discretionary Order” in Rule 11.5(c)(13) as an “[o]rder to buy or sell a
stated amount of a security at a specified, undisplayed price (the “discretionary price”), as well as at a
specified, displayed price.” (20) The Exchange believes that a Member adding a non-displayed discretionary
price to its order is characteristic of an instruction, rather than an order type.
and i disagree. it is not an instruction rather than an order type. there should be a whole paragraph about
how this will benefit the public market and retail investors. just on the issue of transparency alone, this
rule should be disallowed. no market participants should be able to enter an order with more than one price.
it appears that this is another situation with a non-displayed price, which should be disallowed.
DISPLAY OPTIONS (RULE 11.6(E))
An order may either be displayed or non-displayed on the EDGX Book. Accordingly, the Exchange proposes to
include definitions of “Displayed” and “Non-Displayed.” Although the words display and displayed are used in
various Exchange rules, (22) these terms are not currently defined in the Exchange's rules. Therefore, the
Exchange proposes to define Displayed in Rule 11.6(e) as “an instruction the User may attach to an order
stating that the order is to be displayed by the System on the EDGX Book.” The addition of the definition is
not intended to change the substance of how that term is used in the Exchange's existing rules. The Exchange
is also proposing that the Displayed instruction is the default instruction for all orders eligible for
display by the System on the EDGX Book.
there should not be non-displayed orders. they were not authorized in the first place. this section is
missing a paragraph about how this benefits the public market and retail investors in particular. i don't
think it benefits anyone other than brokers and marketmakers. non-displayed orders and prices should not be
authorized because it is against the guiding principle of transparency.
The Exchange believes that a Member adding a Non-Displayed instruction to its order is characteristic of an
instruction, rather than a standalone order type.
and i disagree that it is an instruction rather than an order tyype. the exchange seeks to preserve
advantages for marketmakers and brokers and disadvantage retail investors. the order type should be
disallowed. the exchange will re-file to preserve this advantage because this is what the marketmakers want
them to do. undoubtedly they will come up with new and different reasons about why these advantages need to
be preserved for certain brokers.
The proposed definition of Non-Displayed differs from the existing definition of Non-Displayed Order in
several ways. The Exchange does not propose to carry over to the definition of Non-Displayed in proposed Rule
11.6 the current rule text regarding the priority and ranking of Non-Displayed Orders given its re-
categorization as an order instruction described above.
yes, if the exchange can get the regulators to agree to reclassify the order type to an instruction, they can
preserve the functionality. it doesn't appear to matter to the exchange whether this would impact the retail
public or display on the order book. it appears to me that the exchange is unconcerned about whether these
practices erode the trust of the public.
MINIMUM EXECUTION QUANTITY (RULE 11.6(H))
this is unnecessary. orders should not specify two different prices or quantities.
there is no paragraph explaining how this order type feature benefits retail investors or the public market.
MINIMUM PRICE VARIATION (RULE 11.6(I))
Exchange Rule 11.7, Price Variations, currently defines the term “Price Variation.” Specifically, the
existing definition of Price Variation makes clear that bids, offers, or orders in securities traded on the
Exchange shall not be made in an increment smaller than: (i) $0.01 if those bids, offers, or orders are
priced equal to or greater than $1.00 per share; or (ii) $0.0001 if those bids, offers, or orders are priced
less than $1.00 per share; or (iii) any other increment established by the Commission for any security which
has been granted an exemption from the minimum price increment requirements of Rule 612(a) or 612(b) of
Regulation NMS. The Exchange does not propose to amend the definition other than to remove the term,
“indications of interest”, as indications of interest have not existed on the Exchange since its withdrawal
of the Exchange's Step-up order type. (29) In addition, the Exchange proposes to relocate the definition from
Rule 11.7 to proposed Rule 11.6.
i have seen marketmakers enter all manner of prices even today. they should not use hundredths or
thousandths of cents to jump in front of an order queue, particularly if their order is non-displayed to
retail users.
"indications of interest" sounds like another way that retail investors can be frontrun.
the exchange's step-up order type looks like an interesting title.
PEGGED (RULE 11.6(J))
The Exchange currently describes its price pegging functionality as a “Pegged Order” under current Rule 11.5
(c)(6). The Exchange proposes to relocate the language describing this functionality as an instruction under
proposed Rule 11.6. Other than as described below, the Exchange does not propose to substantively amend this
functionality; the Exchange believes that a User instructing the Exchange to peg an order's price is
characteristic of an instruction a User may attach to an order, rather than an order type. Specifically, the
Exchange proposes to change the name Pegged Order to Pegged instruction and to define a Pegged instruction as
an order instruction to automatically re-price an order in response to changes in the NBBO.
this pegged functionality allows more than one price to be attached to an order. that price would not be
disclosed to the public or displayed. this violates transparency and disadvantages the retail investor and
the public market.
an order should have a stated quantity and a stated price, not an offset price that might slide.
PERMITTED PRICE (RULE 11.6(K))
The Exchange currently defines the term “Permitted Price” in Exchange Rule 11.5(c)(4)(B), which states that a
short sale order that is subject to the Exchange's short sale price sliding process will “be re-priced to
display at one Minimum Price Variation above the current NBB.” The Exchange does not propose to amend the
definition other than to delete it from Rule 11.5(c)(4)(B) and add relocate it under proposed Rule 11.6.
this should be deleted because the price "slides", therefore there is more than one price per order.
RE-PRICING (RULE 11.6(L))
The Exchange currently offers various re-pricing instructions which, in all cases, result in the ranking
and/or display of an order at a price other than the order's limit price in order to comply with applicable
securities laws and Exchange Rules. Specifically, the Exchange's re-pricing instructions that are designed to
permit Users to comply with: (i) Rule 610(d) of Regulation NMS; or (ii) Rule 201 of Regulation SHO are
currently described under Exchange Rules 11.5(c)(4) as the “displayed price sliding process” (33) and “short
sale price sliding process.” (34) The Exchange proposes to delete Rule 11.5(c)(4) in its entirety and replace
it with proposed Rule 11.6(l), which will describe in more detail and provide additional specificity
regarding the re-pricing instructions currently available to Users by introducing and defining four new terms
with regard to Regulation NMS compliance—Price Adjust, Hide Not Slide, Single Re-Price, and Routed and
Returned Re-Pricing, and three new terms with regard to Regulation SHO compliance—Short Sale Price Adjust,
Short Sale Price Sliding, and Short Sale Single Re-Price. (35)
there should be one price and one quantity per order. no sliding prices. no hiding prices. no price
adjustments.
it is funny that the examples for this section appears to violate MINIMUM PRICE VARIATION (RULE 11.6(I))
this example is priceless:
Example No. 4.
Resting Sell Order Prevents Displayed Limit Order with a Post Only Instruction to Buy from Executing at
Locking Price
SHORT SALE PRICE ADJUST (RULE 11.6(L)(2)(A))
Under the Short Sale Price Adjust instruction, the System will cause an order to sell with a Short Sale
instruction to be ranked and displayed by the System on the EDGX Book at the Permitted Price. (44) Following
the initial ranking, the order to sell with a Short Sale instruction will, to the extent the NBB declines,
continue to be re-ranked and displayed by the System on the EDGX Book at the Permitted Price down to the
order's limit price. The order to sell with a Short Sale instruction will receive a new time stamp each time
it is re-ranked. All orders to sell with Short Sale instructions that are re-ranked and re-displayed by the
System on the EDGX Book pursuant to the Short Sale Price Adjust instruction will retain their priority as
compared to each other based upon the time such orders were initially received by the System.
this sliding price situation appears to violate the idea that one order should have one price. there are
automatic queue jumping features to it, to place the order ahead of any bid by retaining priority.
Example No. 1.
Assume the NBBO is $24.00 × $25.00. If an incoming order with a Non-Displayed instruction is entered into the
System to buy at $25.00, it will be ranked by the System at $24.50 with discretion to $25.00, its limit
price.
there is more than once price associated with an order. it violates the transparency principle. it
advantages marketmakers and informed brokers and disadvantages retail investors and the public market.
RESERVE QUANTITY AND REPLENISHMENT AMOUNTS (RULE 11.6(M))
Exchange Rule 11.5(c)(1) currently defines a “Reserve Order” as “[a] limit order with a portion of the
quantity displayed (`display quantity') and with a reserve portion of the quantity (`reserve quantity') that
is not displayed.” The Exchange believes that a Reserve Order is more appropriately described as an order
instruction, rather than an order type. Therefore, the Exchange proposes to delete the term Reserve Order and
replace it with the order instruction “Reserve Quantity” in proposed Rule 11.6.
the exchange seeks to keep the functionality by classifying as an instruction. this hides quantity from the
retail investor and public markets in order to advantage informed brokers and marketmakers. this violates
the dodd frank principle of transparency.
instructions that hide quantity or prices should be disallowed.
ROUTING/POSTING INSTRUCTIONS (RULE 11.6(N))
As discussed in more detail below, the Exchange proposes to describe the routing and posting instructions
available to Users under the Exchange's rules under new proposed Rule 11.6(n). Specifically, proposed Rule
11.6(n) defines the following routing and posting instructions that a User may select, depending on the order
type: (i) Aggressive; (ii) Super Aggressive; (iii) Book Only; (iv) Post Only; (v) Destination Specified; and
(vi) Destination-on-Open.
The Exchange proposes to introduce two new terms to its rules—Aggressive and Super Aggressive. Aggressive is
an order instruction that directs the System to route such order if an away Trading Center crosses the limit
price of the order resting on the EDGX Book. Super Aggressive is an order instruction that directs the System
to route such order if an away Trading Center locks or crosses the limit price of the order resting on the
EDGX Book. The Exchange believes adding definitions for these terms will provide additional transparency to
the Exchange's rules.
how does this add transparency to exchange rules? this hides the behavior of the informed traders and
marketmakers. just getting a rule passed by the SEC is insufficient to inform retail investors of the
allowed behavior of marketmakers. frankly, if the behavior of marketmakers was fully disclosed, there would
be riots in the street.
i have no problem with limiting an order to a particular exchange. while i cannot do it with my broker, i
think this should be allowed. maybe, sometime in the future, my broker will allow me to own my order and
make choices.
SHORT SALE AND SHORT EXEMPT (RULES 11.6(O) AND (P))
Although certain current Exchange rules refer to the terms “short sale order” and “short exempt,” (53) the
Exchange rules do not specifically define these terms. Therefore, the Exchange proposes to add definitions
for “Short Sale” and “Short Exempt” as these terms are currently understood by Users of the Exchange and to
clarify that each are instructions that a User may include on an order. Specifically, proposed Rule 11.6(o)
would state that a “Short Sale instruction shall have the same meaning as the Short Sale definition contained
in Rule 200(a) of Regulation SHO.” Rule 11.6(p) would define a Short Exempt instruction as a “an instruction
on an order with a Short Sale instruction that satisfies the requirements set forth in Rule 201 of Regulation
SHO.”
let us see these reported correctly to FINRA. i am tired of seeing a great deal of volume not reported. i
am also tired of seeing daily shorting volume that is not cleared within 3 days of the transaction.
TIF (RULE 11.6(Q))
As described below, the Exchange proposes to describe the TIF instructions available to Users on the Exchange
under proposed Rule 11.6(q), to include the following instructions: IOC, Day, FOK, and Good-`til Time
(“GTT”).
The Exchange proposes to relocate IOC, Day, and FOK from current Rule 11.5(b) with minor clarifications. (54)
Specifically, the Exchange proposes to incorporate the existing definitions of an “IOC Order,” “Day Order”
and “Fill-or-Kill Order,” as set forth in Rules 11.5(b)(1)-(3), into proposed Rule 11.6(q).
there should be no "fill-or-kill" order instruction or type. all orders should be executable and not
automatically cancellable.
these limit orders converting to market orders is difficult. basically, marketmakers can see the order book,
can see the limit prices and seek to force execution of many orders at one time. this works very well for
shortsellers: they can decrease the demand by overwhelming the bid queue until the bid queue decreases, and
then repeatedly sell into the bid until they hit a significant price point with a significant quantity and
then let those (limit orders which turned into market orders) execute, further decreasing price.
the exchange is responsible for accepting orders from market participants. they are responsible for
executing orders according to instructions. as such, if the orders violate rules and regulations, the
exchange is responsible for co-endorsing the trades because they provided a venue for such execution.
there does not appear to be any disqualification from exchange privileges discussed.
there is no marketmaker qualification and disqualification discussed.
PROPOSED RULE 11.9, PRIORITY
since priority can be preserved when price or quantity changes, this section can be used to jump ahead of
other orders on the queue. that should not be allowed.
Example.
Assume the NBBO is $10.01 × $10.02 and the Exchange BBO is $10.01 × $10.02. Also, assume that the displayed
and Reserve Quantity of each order have the same time stamp. The EDGX Book contains the following buy orders,
ranked in time order:
Buyer One: $10.01 × 100 shares displayed/Reserve Quantity of 500
Buyer Two: $10.01 × 100 shares non-displayed
Buyer Three: $10.01 × 100 shares displayed/Reserve Quantity of 500
this is the problem with allowing non-displayed quantity or price. what is displayed?
buyer one: 100 shares at $10.01
buyer three: 100 shares at $10.01
and who is this tricking? the less informed public and retail investors.
this section is showing how they trick the displayed order queue. why is this allowed? does it matter if
they call it an order type or an instruction?
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in theFederal Registeror within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
i think the SEC needs to choose (B). further, the SEC needs to make some attempt to determine the wisdom of such practices in light of the extreme disadvantage to other non-broker or non-marketmaker participants in the market. apparently the exchange is not worried about the confidence of the public in drafting this proposal. it remains a proposal despite the fact that most of these practices are currently enjoyed by brokers and marketmakers. the exchange chooses to disregard the harm of these practices.
do you want to see how honest these brokers are?
attached picture by markit securities.
they generally borrow 4 times a year, i guess, during the quarterly audit. they naked shortsell the rest of the time.
that would be a breach on the clearinghouse (not buying in), the buying broker (breach of duty to their client) and the selling broker (market deadlines)
and i would wager that several of the offending parties are marketmakers.
suzanne hamlet shatto
seattle, WA