As most of you know, we are not afraid to get into a scuffle or two when it comes to defending our positions on market structure. We have had a few instances in the past where some market participants took exception with our tone and tried to put a muzzle on us. Well, that didn’t quite work for them. But like a fighter in a tournament, it is sometimes nice just to watch your opponents go at it and bloody each other up for a change. That is exactly what we found in a comment letter recently written to the SEC regarding its proposal to ban flash orders.
Quick background: Flash Orders were proposed to be banned by the SEC last year after a big controversy in the market. These orders are essentially free looks to a subset of market participants. Most people in the investment community felt they border on front running and should be illegal. We like, others, thought banning them would be a no-brainer. But the SEC met with stiff resistance from the options community and had to resubmit their proposal to ban them on July 2nd of this year. Comments are still being received and that is where we found this comment letter from NYSE Euronext.
To sum up their letter, NYSE thinks flash orders (or as they call them “flash mechanisms”) are “detrimental to the industry.” They attack the CBOE for their defence of these flash orders repeatedly in their letter. We won’t go into all the detail but here are a few good excerpts:
“Allowing flash order mechanisms to continue in the listed options markets will harm investors by giving privileged traders unequal access to pricing information while potentially raising the costs to the rest of the marketplace, since the mechanism enables a select group to participate on a trade without first providing the most competitive quote.”
“Knowing that a marketable order will be flashed encourages market participants to provide less aggressive prices and instead get a preview of risk versus opportunity prior to making the decision to trade, ignore, or take advantage of the information presented by the flash (e.g., market makers potentially moving their quote on another market to avoid interacting with the routed order).”
“We believe that the data presented by CBOE with respect to NYSE Arca is inaccurate, misleading and distorts the true picture of the quality of each exchanges market.” Meowwww, catfight!
“CBOE’s flash mechanism is utilized primarily during those times when CBOE is not at the NBBO… It is precisely these times when, but for the flash mechanism, CBOE would be required to route to the away market displaying the best price.” Bam, take that!
“CBOE’s poaching of the order away from the better priced market, whose customer or market maker rightfully deserves the execution, acts as a direct disincentive to aggressively price orders and quotes, across all market centres.” Meowwww!
“CBOE’s analysis also fails to discuss the impact of rebates and payment for order flow on the exchange.” BAM!
“CBOE is incenting its market makers to participate in the flash mechanism so as to save CBOE money, not CBOE’s customers.“ Knockout!
You have to wonder if the exchanges don’t trust each other, then how are we supposed to trust them.