Analysis: Complaints rise over complex U.S. stock orders

Fri Oct 19, 2012 3:54pm EDT
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By Herbert Lash

NEW YORK (Reuters) - Allegations of abuse over how a stock trade is executed may soon bring a new black eye to Wall Street or amount to little more than another warning about high-frequency trading.

The numerous order types - the instructions that govern price and other variables in a trade - and their use by high-frequency traders have sparked a growing debate over the structure of the U.S. marketplace.

Order types can reach an estimated 2,000 variations as a fully electronic market and more than 50 trading venues have multiplied the possibilities of how, when and with whom to trade. And they have changed how buying or selling interest in the market is detected.

Using order types to outsmart other traders has become the latest skirmish in a battle over the merits of high-frequency trading. While the proliferation of new order types baffles many market participants and has sparked talk of abuse, little proof of manipulation has shown up so far.

The largest and most powerful traders in the market use order types to gain a more favorable position in the order book and the exchanges have helped their best clients achieve that edge, said Sal Arnuk, a co-founder of brokerage Themis Trading LLC in Chatham, New Jersey.

"My point is the exchanges are providing their largest customers by revenue and volume, guaranteed economics. If that's not a red flag, I don't know what is," he said.

For their part, officials at U.S. exchanges are adamant that new order types are transparent and fully disclosed. Anyone can use order types. They are not just available to high-frequency traders.

Gary Katz, president of the International Securities Exchange, a leading U.S. options exchange, said complaints about poor disclosure are unwarranted as exchanges are required to make documentation on new order types available to everyone.   Continued...