ahead of more changes in U.S equity markets
April 8, 2016
As equities trading and regulation evolve, the New York Stock Exchange (NYSE) continues to evolve as well, with new innovations, technologies and order types for its clients.
On March 24, the NYSE filed with the Securities and Exchange Commission (SEC) a proposal to offer Discretionary Pegged Orders. This order type is a limit order that pegs to the same-side Protected Best Bid and Offer (PBBO) and is eligible to exercise discretion to trade at the midpoint of the PBBO in order to provide price improvement to contra-side orders.
A Discretionary Pegged Order will not exercise discretion to trade at the midpoint if the PBBO is determined to be unstable, a situation referred to as a “crumbling quote”. Adjusting the price of a customer’s order based on the anticipated status of the PBBO rather than its current status is a practice commonly used by brokers, but historically is not permitted to be offered by a national securities exchange.
If approved by the SEC, Discretionary Pegged Orders will provide an objective and transparent manner for the NYSE to assess the quality of the quote and determine quote instability. This is consistent with the NYSE’s history of transparent and objective price discovery. This proposed order will also provide NYSE clients with the increased ability to manage the price of their resting order and passively participate with contra-side order flow, with the exchange monitoring the quality of the quote on their behalf.
This filing follows a similar proposal put forward by IEX, a dark pool that is currently seeking formal SEC approval to operate as a national securities exchange. An ATS is a venue for matching buy and sell orders, however it is not subject to the same stringent regulatory requirements of a national securities exchange like NYSE or NASDAQ.
According to Stacey Cunningham, NYSE Chief Operating Officer, the proposal on Discretionary Pegged Orders is significant in the context that it is a catalyst to broader conversations on the issues of changing U.S market structure, and also the boundaries of when an exchange can offer a service that would otherwise be performed by a broker dealer.
“The NYSE has publicly put forward its views on the IEX application to become a national securities exchange on the basis of concerns relating to the fact that their operational model is not compliant with the current interpretation of Regulation National Market System (Reg NMS). We do not oppose their proposal to offer a Discretionary Pegged Order, provided approval is applied uniformly across all national securities exchanges,” said Cunningham.
“If the SEC is supportive of expanding the types of services exchanges can offer, the New York Stock Exchange will look to provide our clients with the most comprehensive offering possible.”