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May 08, 2014

NYSE to eliminate several complex order types to rein in HFT

IntercontinentalExchange calls for simplification of trading to restore trust in markets

The owner of the NYSE will eliminate certain types of trading, calling on other exchanges to do the same, in a bid to help eliminate the advantages of high-frequency trading (HFT).

IntercontinentalExchange Group (ICE), which took over the NYSE last October, is seeking regulatory approval from the SEC to ban more than 12 specific types of trading, Jeffrey Sprecher, the group’s CEO, said in a conference call with analysts.

‘We will voluntarily reduce the number of order types at our US equity exchanges,’ Sprecher said during a conference call scheduled to discuss corporate earnings. ‘We believe we can start by unilaterally reducing the excessive complexity that exists today.’ He didn’t say exactly what types of trading may be eliminated, but he added that ICE ‘will continue to evaluate our other order types to identify those that may not be providing the market with true utility.’

HFT has been under intense scrutiny since the so-called ‘flash crash’ four years ago this week. The recent release of the book Flash Boys by investigative journalist and former Wall Street insider Michael Lewis, which alleges that the markets are rigged, has focused attention anew on the practice.

Last week, the NYSE agreed to pay a fine of $4.5 mn after the SEC charged the exchange with failing to adhere to its own rules. The regulator says that, between 2008 and 2012, the exchange operated a block trading facility that did not comply with its own rules, gave its floor brokers closing order information earlier than NYSE rules stipulated, and gave potentially beneficial contract terms to certain customers.

Sprecher added in the conference call that ICE has recently been developing around six new order types that are ‘smart and could put the hurt on competitors’ but that increasing complexity further would ‘ultimately hurt US investors’. So while he said that ‘there were some who did not initially like this idea’ of dropping them, these order types wouldn’t be adopted.

He also called for action from competitors, saying that ‘exchanges and dark pools should adopt a moratorium on creating any new types of orders’. Competitors that continue to create more complex order types are ‘setting themselves up for long-term failures,’ he added.