Discussion in 'Trading' started by eusdaiki, Nov 29, 2005.

  1. The NYSE Hybrid MarketSM plan expands
    execution choices. Investors and traders
    will be able to choose from the speed and
    certainty of an automatic execution or the
    opportunity for price improvement from the
    auction market. Automatic trading is a
    dramatic change for the NYSE: Ever since
    the first trade took place in 1792 under
    the Buttonwood Tree, the NYSE has
    operated an auction market. The NYSE
    Hybrid plan and Regulation NMS will
    enable the listed market to trade with the
    efficiency of OTC-stocks. In our three-part
    series, we will look at the Hybrid proposal.
    This month we will examine Hybrid basics
    — how the proposal changes the current
    market for liquidity takers. In subsequent
    issues of Equity Research & Strategy, we
    will look at the roles of the specialist and
    the floor broker and work through
    examples of how orders will be handled in
    the new NYSE structure.
    Hybrid — The Fast Market
    The NYSE Hybrid MarketSM proposal is still
    pending approval by the Securities and
    Exchange Commission (SEC). Assuming
    regulatory clearance, the exchange will
    introduce the Hybrid market in phases with
    the final rollout occurring in the Spring of
    2006. This phased rollout, according to
    exchange officials, will provide the
    specialist, floor and market participants
    the opportunity to slowly get used to the
    new execution priority and the new ways
    to interact in the marketplace. NYSE
    Hybrid fundamentally changes how the
    NYSE will operate for liquidity takers. In the
    auction market, the specialist was
    primarily the catalyst for trading. The floor
    could participate or go along with any
    execution. In the new Hybrid trading rules,
    the auto-execution order has priority, giving
    market participants greater execution
    speed and certainty.
    New Order Types
    Three new order types are being introduced
    — an auto-ex order type, and Auction Limit
    (AL) and Auction Market orders. AL orders
    enable investors to send orders to the
    specialist in order to seek potential price
    improvement from the auction market.We
    will discuss the AL order type in more
    detail next month when we focus on the
    role of the specialist.
    From the time the exchange officially
    disseminates a price until 3:59:00 P.M., all
    NYSE Hybrid market quotes will be subject
    to automatic execution unless designated
    otherwise (see Liquidity Replenishment
    Point below). To achieve an auto-execution
    market, the exchange is expanding NYSE
    Direct+®. The NYSE is eliminating the size
    restrictions (1,099 shares for stocks and
    10,000 shares for Exchange Traded Funds
    [ETFs]) and the current 30-second
    limitation for consecutive orders. They are
    also creating a new “Immediate-or-Cancel”
    (IOC) order type and will permit auto-ex
    market and auto-ex marketable limit orders
    to “sweep” the NYSE Display Book®.
    NYSE sweeps operate differently than in
    the OTC market. In the OTC market,
    investors are filled at each price level. In
    an NYSE sweep, if the sweep extends
    beyond the BBO, a “clean-up” is
    determined and intervening posted
    liquidity is afforded price improvement.
    Let’s look at some examples.
    In the case of a buy, the order will execute
    at the offer price for the published volume.
    The Regulation NMS order-protection rule
    protects top-of-file quotations in the
    national market. The NYSE will sweep
    price-level by price-level and in
    accordance with Regulation NMS. The
    NYSE will then send orders to other market
    venues whose top-of-file quotation (not
  2. the depth of book) are in the sweep
    (Figure 1). The NYSE will seek to
    internalize as much of the order as
    possible. Although the sweep will respect
    the order-protection rule for the top of
    file, it will not send orders to better-priced
    liquidity that is in the depth of book of
    another market venue. The SEC still must
    determine if the specialist can decide to
    add liquidity and match other “protected”
    market venue quotations to avoid routing.
    Sweep orders will execute to a price level
    that is either the order’s limit price, fills
    the order or reaches a Liquidity
    Replenishment Point (LRP).
    Clean-up Price
    All sweeps beyond the BBO will have two
    execution prints — the liquidity that was at
    the published BBO and then a “clean-up”
    price. The “clean-up” price is the price level
    that completed the order. It could be either
    the order’s limit price, the level that
    completed the order or a Liquidity
    Replenishment Point. Resting bids and
    offers in the NYSE Display Book® between
    the displayed BBO and the price at which
    the sweep ended (the clean-up price)
    receive price improvement. For example,
    (Figure 2), a sweep from $23.96 to
    $23.99 will have two prints — the stock at
    $23.96 and the clean-up price at $23.99.
    Any resting orders at $23.97 and $23.98
    will receive price improvement and be
    printed at $23.99.
    Liquidity Replenishment Point (LRP) —
    Temporary Suspensions in Auto-Execution
    The NYSE believes that a pure autoexecution
    market introduces undesirable
    volatility. Rather than allowing prices to
    gyrate at times of market stress or order
    imbalances, the exchange has created LRP
    “circuit-breakers.” LRPs are volatility
    moderators that suspend auto-execution
    and provide the specialist, crowd and
    market participants the opportunity to
    enter orders and replenish liquidity on
    either side of the market. Two LRPs are
    proposed — a Price-based LRP (P-LRP)
    and a Momentum-based LRP (M-LRP).
    The P-LRP is a minimum of five cents from
    the exchange bid or offer rounded to
    the nearest nickel. For example, if the
    market is $20.10 - $20.12, the P-LRP
    is at $20.05 - $20.20. If the market is
    $20.04 - $20.09, the P-LRP would be
    $19.95 - $20.15.
    The M-LRP may be triggered if electronic
    trading results in rapid price movement
    over a short period of time. If a security
    has moved the greater of 25 cents or
    1 percent of its price within 30 seconds,
    automatic trading is suspended. An
    M-LRP in an $18.00 stock would be 25
    cents. The M-LRP in a security priced at
    26.49 would be rounded down to 26
    cents. The benchmark price of the M-LRP
    is determined by the high/low trades that
    occur in the prior 30 seconds.
    Hitting an LRP and the Resumption of
    If the auto-ex market or marketable
    limit sweep order is sent tagged as an
    IOC order, and it hits an LRP and isn’t
    completed (has a residual balance), then
    the remaining balance is immediately
    cancelled. Whenever an LRP is reached,
    auto-execution is suspended and the NYSE
    becomes a slow market venue. NYSE
    quotes at this time will be protected under
    Regulation NMS.
    During this time, when the NYSE suspends
    auto-execution, incoming orders and
    cancellations will continue to be reflected
    automatically in the book. When does
    auto-execution resume? It depends upon
    how the LRP was hit. If the order that
    caused the LRP to be hit is filled in its
    entirety or the remaining balance has been
    cancelled because it was an IOC sweep,
    then automatic executions and auto-quote
    will resume no more than five seconds
    from when the LRP was hit. It can resume
    earlier than five seconds if the specialist
    manually intervenes and either trades or
    re-quotes the market.
    What happens when a non-IOC sweep
    order hits an LRP and has a residual
    balance? The residual balance at the
    LRP will be represented in the auction
    market. It will be represented so that it
    does not lock or cross the national market
    quote. Automatic execution is suspended
    and is required to resume in no more than
    10 seconds. It is expected that the
    specialist will quote or trade before the
    10-second limit has lapsed, unless an
    imbalance exists or a trade is being put
    together by the floor. The crowd has 10
    seconds to complete the trade before
    auto-ex resumes.
    The NYSE is seeking to create an
    integrated auto-ex/auction market. This
    new NYSE market structure will deliver the
    speed and immediacy that traders now
    experience in the OTC market. In the first
    of this three-part series, we looked at the
    basics of Hybrid auto-execution. Next
    month, in the second part, we will
    examine the role of the specialist and the
    floor broker, and how they will interact with
    the auto-ex and auction market orders in
    the Hybrid world. ■
  3. Less than 10 percent of volume in
    exchange-traded funds (ETFs) occurs in
    auction market venues. In fact, in the
    150 most active (by volume) NYSElisted
    securities (from March 27 to July
    7) 20 percent or more of volume was
    executed via FAST electronic market
    venues — through the BLOOMBERG
    TRADEBOOK®, market makers and other
    ECNs in the NASDAQ
    Market CenterSM, and
    auto-ex venues like
    Archipelago Exchange.
    The electronic market
    venues are also a
    significant source of
    liquidity during times of
    stress — for example,
    when breaking news
    affects a stock. The
    challenges to executing
    NYSE-listed stocks are
    well documented.
    Although NYSE Hybrid
    and Regulation NMS will
    improve the market
    structure, they are
    scheduled to roll out in
    the Spring of 2006 —
    nine months! When
    speed, immediacy and
    certainty of execution are
    at a premium, traders may elect to
    avoid slow markets and trade only with
    the fast markets. BLOOMBERG
    TRADEBOOK®’s Order Handling Facility
    AUTO-EX order type can provide traders
    with this level of flexibility.
    The AUTO-EX order type responds only
    to fast market quotes. It respects the
    trade-through rule. Passive limit orders
    are posted in CQS (via NASDAQ Market
    CenterSM), which affords them
    Intermarket Trading System (ITS) tradethrough
    protection. The auto-ex order
    will not respond (send orders) to slow
    market centers. Rather, it will stand its
    ground if a slow market locks, and
    leverage our OTC-style Anti-Lock Breaks
    so that quotes will not lock or cross the
    national market. By standing its ground,
    slow market venues respond to your
    quote as a firm electronic ITS
    commitment to trade. This order type
    can provide a powerful new dimension
    to trading NYSE-listed stocks. Let’s look
    at some strategies.
    Trading ETFs
    Speed, immediacy and certainty are
    critical to ETF traders. It is, in part, one
    reason that ETF trading is dominated by
    the fast market venues. In fact, most
    traders find manual exchanges to be
    inconvenient intermediaries in an
    increasingly efficient marketplace. Since
    liquidity at a price level in these
    securities is typically not an issue, most
    traders would simply avoid manual
    execution venues. For ETFs, the AUTO-EX
    order type enables traders to trade only
    with the fast markets and not have their
    orders unnecessarily delayed by the
    slow venues (Figure 1).
    Splitting Orders between the NYSE
    and Auto-Ex
    Direct participation with liquidity on the
    floor of the NYSE, at times, can be
    critical to an efficient execution. In
    second-tier liquid stocks, although some
    liquidity may be in the third market or
    on the ECNs, traders still have to have
    access to the crowd because floor
    brokers may be actively assembling
    trades. If the order is somewhat
    sizeable, most traders would be
    reluctant to send it down to the NYSE
    via DOT (NYSE SuperDotSM) for fear of
    specialist intermediation and the
    potential for information leakage. Yet at
    the same time, by not participating in
    the trading on the ECNs, third market
    and electronic exchanges could adversely
    impact the order’s average price. More
    and more traders are electing to use
    a “split order” approach. BLOOMBERG
    TRADEBOOK® enables traders to split
    their order — by electronically sending
    a portion of the order to the floor using
  4. our network of independent floor
    brokers (Figure 2) and working the
    remaining quantity using the AUTO-EX
    order type. The floor order gives traders
    representation on the NYSE while the
    auto-ex order trades with the
    fragmented liquidity in the fast market
    venues. Since the auto-ex order type
    avoids the NYSE there will be no
    duplication of efforts.
    Setting up Strategic Orders
    Traders can set up several AUTO-EX
    strategies using BLOOMBERG
    TRADEBOOK® Strategic Orders
    (BTSV <Go>). The first step is typing
    BTSV <Go>, and clicking on the
    “Listed Saved Orders” tab at the top of
    the screen. From here the trader can
    select the side, quantity, appropriate
    strike price and then select AUTO-EX
    from the Bang/Destination field.
    Alternatively, traders can select from
    several AUTO-EX orders in the
    strategic orders. For example, traders
    can select/create multiple strategies
    for various volume levels on either side
    of the market. For instance, buy orders
    for 10,000, 25,000 and 50,000 shares
    that only send orders to execution with
    the AUTO-EX venues. Once the strategy
    is saved and named it will appear
    alongside other strategy buttons on
    the BMQ <Go> single security monitor
    (Figure 3). Traders will typically create
    multiple strategies for various volume
    levels on either side of the market, for
    example 10,000, 25,000 and 50,000
    shares. Depending on the strategy of
    the trader, hitting bids and lifting
    offerings may be appropriate, or a
    specific limit price may be more
    desirable. Clicking on the strategy
    button on the BMQ screen will bring
    up the ticket, already populated with
    the appropriate order criteria.
    The growing percentage of liquidity
    trading away from the primary
    exchanges combined with a trader’s
    desire for immediacy and minimal
    intervention makes the auto-ex order
    type a requirement for the active listed
    trader. Traders want and need to be able
    to execute quickly against available
    liquidity rather than wait for a specialist
    to fill orders. The extent of automation at
    the NYSE following the introduction of
    the Hybrid model is uncertain. Traders
    need the flexibility of the OHF and autoex
    order type to work their orders where
    they feel they are able to seek the best
    execution for their particular strategy.
  5. In last month’s Equity Research & Strategy,
    we focused on the liquidity taker — how an
    electronic auto-execution order would
    interact with the NYSE Hybrid Market.SM We
    explained how a “multi-price-level sweep”
    would be awarded two prices — the best
    bid/offer (BBO) and a “clean-up” price.
    Beyond the BBO, all executions would be
    cleaned-up — awarded the price level at
    which the sweep stopped. In auction market
    terms, this would be similar to the NYSE
    conducting mini-Dutch auctions for multiprice-
    level sweeps. The clean-up price
    provides price improvement to resting limit
    orders involved in a sweep — and can serve
    as an incentive for investors to add depth to
    the NYSE market. In this month’s issue, we
    focus on what actually happens to orders on
    the NYSE book. How does the NYSE
    matching algorithm actually work? It is very
    different from the traditional strict time/price
    priority in OTC market venues (ECNs, ATSs,
    electronic exchanges, etc.) and the trading
    rules on the global electronic exchanges’
    matching engines. Hybrid follows Priority, Parity
    and Precedence.
    There are three constituent groups in the
    NYSE market — the public NYSE Display
    Book®, the floor broker and the specialist’s
    dealer account.We are going to focus on the
    role of the specialist in next month’s Equity
    Research & Strategy.
    The Role of the Floor Broker
    The NYSE Hybrid MarketSM is designed so
    that floor brokers can continue to represent
    their customers in the auction market as they
    do today — work-up trades and negotiate
    prices without being required to disclose
    their intentions to other participants. They
    can use their judgment and represent/work
    large orders on behalf of their clients both
    electronically and in person and on the
    trading floor.
    Floor brokers can represent orders in the
    electronic market (making them available to
    auto-execution sweeps, etc.) via a “Broker
    Interest File.” The interest file is an electronic
    placeholder. Because the brokers tend to
    represent large orders, the NYSE has
    provided them with “Reserve” functionality. To
    use Reserve, the floor broker has to display a
    minimum of 1,000 shares. For example, if
    the broker is working a 25,000-share order,
    he has to display a minimum of 1,000
    shares and the balance (24,000 shares) can
    be undisplayed in Reserve. The broker can
    have “interest” (with a Reserve component)
    at varying price levels. Additionally, the floor
    broker’s display interest will not be publicly
    disseminated to the public unless it is at the
    BBO. The floor broker is only permitted to
    have interest in only one crowd (or station
    position) at a time. The NYSE will be
    reconfiguring the trading posts to
    accommodate five stocks.
    Priority, Parity, Precedence
    The controversy of Hybrid stems the
    application of Priority, Parity and Precedence
    (Rule 72 in Amendment 5 — Federal
    Register, June 29, 2005). To understand how
    this execution hierarchy operates, let’s work
    through an example (Figure 1).
    Let’s assume that the market is 99.27-28,
    1,000 x 1,000. Let’s assume that you are
    the first bid at 99.26 for 1,100 shares. A few
    seconds later, another public order arrives for
    500 shares. Floor broker A places broker
    interest for 1,000 shares (with 10,000
    shares in Reserve) and then floor broker B
    places interest at 99.26 for 1,000 shares
    (with 49,000 shares in Reserve). The publicly
  6. disseminated display book at 99.26 is
    1,600 because the floor broker interest is
    only disseminated when it is at the BBO.
    Now, the 99.27 bids get hit and the market
    is 99.26-28. All of the broker interest is now
    disseminated and the market is 99.26-28,
    3,600 x 1,000.
    Priority — The first bid has priority for the
    first incoming order.
    The priority in the execution queue is for
    display — Reserve is at the end (Figure 2 —
    Part 1). Let’s assume that two auto-execution
    orders arrive within a millisecond of each
    other to hit the 99.26 bid. The first incoming
    order is for 100 shares and the second one
    for 3,000 shares. Being first at the level gives
    you priority for the first order that comes in —
    in this case the 100 shares — but your order
    will not be completed with the second
    incoming order of 3,000 shares. After the
    100-share trade “clears the floor” (the
    NYSE’s terminology for when the trade is
    matched), the book flips to parity in order to
    get ready for the “next auction” for the next
    incoming order.
    Parity — The auction market takes over —
    all orders at the price level “Go-Along” and
    share in subsequent executions.
    The book (Figure 2 — Part 2) takes on a
    different form. The public book (your
    remaining 1,000 shares and the 500 shares
    that arrived after your order) are represented
    together and each broker interest joins in
    parity. So when the 3,000-share order
    arrives, it gets shared. The public book gets
    1,000 shares and the two broker interests
    each get 1,000 shares (Figure 2 — Part 3).
    In the public book, you and the other bidder
    at 99.26 each RECEIVE 500 shares. You
    remain on the bid for 500 shares. Note, all
    disclosed interest trades before Reserve. So
    if the incoming order was larger than 3,000
    shares, only the 1,000 shares per broker
    would be on parity — broker Reserve would
    trade only after your order was completed.
    Let’s assume that the incoming order is only
    2,500 shares. Again, the market is on parity
    so the trade gets split three ways — the
    public book getting 834 shares (with your
    order and the other public order receiving
    417 shares each) and the two broker
    interests getting 833 shares each. If the
    market goes to 99.27 bid again, the display
    at 99.26 level remains on parity — so if the
    market goes back to 99.26 bid, the three
    books will share the incoming order. If
    another order arrives at 99.26, it will be
    placed in execution priority ahead of the
    broker Reserve at the level, but behind the
    displayed orders that are on “parity.”
    The Global Exchanges
    In contrast to Priority and Parity, the global
    electronic exchanges would execute in
    time/price priority. The first order of 100
    shares would execute with your order. The
    second order of 3,000 shares — 1,000
    would execute with your order, 500 toward
    the second public order, then 1,000 would
    go to the floor broker A and 500 to the floor
    broker B.
    Precedence — Provisions for size
    Rule 72 discusses a concept called
    “precedence based on size.” This means that
    a bid or offer that can trade with the entire
    size of an incoming order may supersede
    lesser-sized orders. In today’s auction market,
    this practice is rarely employed — as the
    specialist typically enables floor brokers at
    the same level to Go-Along with the trade so
    they don’t miss out on prints. It’s not clear
    how this provision would be implemented in
    the Hybrid-matching algorithm.
    Hybrid’s matching algorithm will be unique
    among markets that offer electronic access.
    Global exchanges, ECNs, ATSs and other
    electronic exchanges typically employ
    time/price priority when matching orders. The
    NYSE believes that the auction market adds
    value to the execution process and has
    designed a system to replicate electronically
    what happens generally in the auction
    market today. Priority, Parity and Precedence
    enable orders to share in execution prints,
    much like the auction process. NYSE Hybrid
    introduces more execution choices. Regulation
    NMS creates a level playing field for market
    venues to compete. Thus, investors will be
    able to choose if time/price or Priority, Parity
    and Precedence is best for their order.
  7. Here's a couple of articles that I found from Bloomberg regarding the NYSE-ARCA merger. Have fun reading 'em.
  8. I read the actual pdf version (much easier to read) and have a couple thoughts.

    Isnt order parity totally unfair? Does any other market operate not on a first come first serve time based priority? So what if the first order is priority filled, what if its 100 shares and the next fill is 5000 shares? I really dont understand how its fair that i get in line after everyone else has been waiting and split the fill with people. Also, I was under the impression orders represented on the book get filled before floor brokers not displaying on the open book, so now i have to split fills with them? Again, i need help with this logic.

    Second, the clean up price on large sweeps also seems ridiculas. If i list on the offer to go short, for instance, and a large market order comes in and needs to take out the next 4 price levels to fill, i would be filled at the inside price while the people offered 1 and 2 cents higher get price improved to the 3rd cent, while im offside 3 cents instantly? Why is that fair. There would be more incentive for me to list a cent higher and never be at the inside price for opening long/short positions because i would constantly be offside a few cents by some big order not improving me.

    Any help on why they decided on these features would be helpful.
  9. where can i find the pdf?
  10. It is unfair and that is the point. I read these concerns in a few articles a while ago and it's quite interesting. With these new BS rules, the NYSE can preserve & protect their racket while at the same time throw the traders & programs against each other in the fast electronic market. Whenever needed, the specialist will step in and the good ole boys will execute what they need, steal their cut and then let the electronic market with pennying fighting continue.
    The floor get priority on fills when it goes into auction mode and separate the electronic orders from the floor orders unlike it is now where the book gets priority based on time and price (except block prints).
    And the game continues.
    #10     Nov 30, 2005