As Nasdaq continues to develop and propose, then either withdraw or justify new stock order types that seem to benefit only the select few, let’s review a recent order proposal and how it may impact investors.
In November of 2016, Nasdaq proposed a new order type they named the Extended Life Priority Order (ELO). This was also shortly after the IEX to became the 13th US Stock Exchange. This ELO order type has been incorrectly compared to the time delay similar with IEX’s “speed bump”.
The time delay was implemented by IEX to create a level playing field and prevent leakage of information to HFT firms, whereas the feature of holding an order with priority in the ELO Order are two very different things. It’s widely known that Nasdaq opposed the speed bump used by IEX, although it is universal and in no way identifies certain trades or the origination.
The ELO order, on the other hand, is an optional order type, and should not be confused with the universal speed bump. Only certain customers will have access to the EDO which is specifically retail order flow, although there is a plan to include institutional investors sometime in the future. The objective of the ELO is to reward investors that do not cancel their order for at least 1 second, by moving them to the front of the line. The ELO order is given priority over non-ELO orders, and it is clearly identified as an order that will not cancel or change within a specified time period.
ELO Identified Order Equates to Information Leakage
The fact that the ELO order is identified and displayed as one that will not change or cancel, is evidence enough that this is leakage of information. Some are attempting to justification this by implying that this is a way to beat the HFTs at their speed game, and your order will be filled. This comes at what price to investors?
These ELO orders that contain a unique identifier will be instantly seen by the HFT firms and any broker with a prop data feed. This is very valuable information! This information leak can and does alter the NBBO, swaying the price for all non-ELO orders or any trades executed on a slower platform. Altering the NBBO with pending trades is altering the market, which is never good for investors.
John Ramsay, Chief Market Policy Officer at IEX, raised several good points to the SEC In a letter dated March 2, 2017, regarding Nasdaq’s ELO proposal. By requiring that all ELO orders are identified alerts predatory HFTs to identify orders from institutional investors, which can be detrimental to those investors. Prop data feed customers currently use information provided by the electronic trading firms, this mandatory identification of ELO orders will identify retail orders. This type of order would actually elicit more predatory trades.
John Ramsay continues to point out that while Nasdaq makes reference to the Toronto Stock Exchange’s (TSX) “Long Life” orders, they do not mention that the TSX does not identify those orders, particularly to decrease possible information leakage.
IEX is asking the SEC to not approve this ELO proposal unless Nasdaq removes the requirement for identification. While Nasdaq justifies how they reward participants and improve the market, it seems obvious that this ELO order is another mechanism to leak client identity and information.
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