Is The SLP The NYSE's Answer To Direct Edge's "Advance Look" Enhanced Liquidity Provider Program Or You Trade You Lose, You Trade Goldman Wins

Tyler Durden's picture

There is a curious article in the latest edition of Traders Magazine. It is curious mostly because it was allowed to be published, as it definitively peels off the cover of what truly happens at the pantheon of stock exchanges, that dominated by a private club of select high frequency traders, who obtain better and faster pricing than everyone else, and where the group of "select few" is seemingly legally allowed and even encouraged to front-run the "every-one else" (you, dear reader, are most likely in the latter camp). If you ever wondered why HFT generates profits of over $20 billion a year, please read this article.

As for Zero Hedge's intents, we would yet again request feedback from the proper authorities on whether one can derive more than superficial similarities between the method of operation of Direct Edge's Enhanced Liquidity Provider (ELP) program and NYSE's Supplemental Liquidity Provider program (aka, the Goldman kiss). Amusingly, it is none other than the NYSE's own Larry Leibowitz who raised the most ruckus about the potential abuse of the ELP program.

At an industry conference on market structure in May, a panel on market centers broached the subject of "flash" orders and almost ended in fisticuffs. In one corner was defending champion William O'Brien, CEO of Direct Edge. In the other was Larry Leibowitz, his hot-under-the-collar opponent from the Big Board...The head of U.S. execution and global technology at NYSE Euronext assailed Direct Edge's Enhanced Liquidity Provider or ELP program as the "enhanced look" program, comparing it to the advance look at orders that NYSE specialists used to get. That practice was seen as giving specialists unfair advantages over other market participants, and potentially disadvantaging order senders.

Wait, Flash orders, enhanced looks... What?

From the article:

Flash orders are also called "step up" or "pre-routing display" orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue's participants and soliciting NBBO-priced responses. [TD: frontrunning is not quite the right word here, but it fits so damn well] If there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

NYSE Euronext's anti-flash tirade didn't end with the SIFMA conference. The exchange operator, along with market-making firm GETCO and SIFMA, weighed in on the Nasdaq and BATS flash order types with formal letters to the Securities and Exchange Commission. NYSE and SIFMA urged the SEC to abrogate the Nasdaq rule filing and reject BATS's filing. All three pushed the SEC to study the potential impact of flash orders on the marketplace before deciding whether to give them free rein.


NYSE and GETCO charged that markets with flash orders were essentially running private markets of quotes for select participants that competed with the public quote stream. With Nasdaq and BATS rolling out new order types to combat Direct Edge, the upshot, in their view, was bad market structure and probably eventual harm to investors.

[read the following paragraph very closely as it is at the heart of the 4 month long tirade on Zero Hedge against the NYSE, against Program Trading, against the SLP and against Goldman Sachs]

These firms and SIFMA argued that flash order types call into question some of the basic tenets of the equities market structure. In various combinations, they claimed that the effort to keep flow in-house undermines the concept of a quotation, impairs the meaningfulness of the NBBO, jeopardizes liquidity provision by hurting liquidity providers quoting at the NBBO, and potentially upsets the pursuit of best execution.

So the NYSE is making a mega fuss about a potential market entrant that does what everyone else does -  understandable, nobody like competition, especially not the New York Stock Exchange which has been losing market presence and top line revenue by the boatload recently. Yet the question stands just how much of this "best kept secret" protocol does the NYSE employ currently to facilitate Supplementary Liquidity Providers, or rather, Provider (singular) - Goldman Sachs. When one firm dominates 50% of principal HFT trading on an exchange and, according to the above logic, can legally front run the other half, what does that mean for the rest of the world?

Continuing with the article:

NYSE Euronext, despite frowning on flash orders, may wind up joining the party. Joe Mecane, executive vice president for U.S. markets at the company, notes that if the SEC allows these flash order types to stand, NYSE Arca would probably convert an existing order type into a flash-type interaction, and would look to more broadly disseminate that information. [TD: Or already is via the SLP?] "If the SEC is implicitly allowing private access to information, we'll need to do it to be competitive," he said. NYSE Euronext may decide to offer flash orders on the NYSE as well, Mecane said. Nasdaq, for its part, is implementing a flash-type order this month on Nasdaq OMX BX, its Boston equities market.

Wait, the NYSE is waiting for the deliberations of the same SEC after it did not even care to hear back on whether or not the NYSE's SLP deserves a comment period, objections, and traditional response time, and which waited until the last day to file an extension automatically assuming it would be granted...(And granted of course it was, as the only beneficiary again was Goldman Sachs.)

The primary argument against flash orders is that they create private
markets and are therefore a step back for market structure. "These
programs are creating a private locked market for a small group of
participants, and they are holding up the execution process for that
marketable order," Mecane said. He added that the Big Board operator
isn't against dark pools, competition or innovative business models.
"Our issue is that this creates a tiered market," he said.

Market maker GETCO told the SEC that by creating a two-tiered market, flash orders give professionals receiving the flashes a leg up over other investors. Non-public quotes could also "negatively affect the broader market, including retail investors who rely on the NBBO to ensure that their orders obtain the best, reasonably available price," the firm said. GETCO argued that flash orders, like dark liquidity that executes at the NBBO, also leave limit orders that established the best price in the lurch.

One wonders what the response of the SEC will be to this allegation. One wonders less, once it becomes painfully clear that any condemnation of two-tiering and flash orders would potentially automatically preclude Goldman from trading 1 billion PT shares a week for its prop trading accounts.

Ironically, NASDAQ and BATS already may be in enough hot water to really raise the temperature on not only Direct Edge but the NYSE as well:

Direct Edge's O'Brien draws a distinction between how the information his market disseminates is seen and what Nasdaq and BATS are doing. His flashes, he said, are sent out on a different data feed than the ECN's depth-of-book feed, while Nasdaq's and BATS's flash orders are not. As a result, the latter exchanges' feeds look like they're locking the market. (Last month, both exchanges added a flag to flashed orders to identify them for subscribers.)


In Selway's view, this argument clouds the point. The point, he said, is that order messages are being broadcast at prices that, effectively, lock protected quotes. This creates an elite tier of traders with access to better-priced orders than those receiving public quotes through the securities information processors, giving flash recipients an information advantage, he said.

Ok, so where are the plethora of voices claiming that advanced exchange looks are completely innocuous and nobody suffers as a result of a select few profiting massively... We are waiting.

Direct Edge's O'Brien argues that critics of his market's ELP program are twisting a successful innovation into a regulatory concern for purely competitive reasons. He said the ELP program gives participants a choice about how they want their order flow handled, and enables customers to lower their market-impact and transaction costs. He also notes that critics of the ELP program, which includes dark pools among its participants, are anti-internalization. Internalization refers to the ability of brokers to match customer orders away from public markets. But the ECN's flash orders, on the contrary, O'Brien said, have "democratized access to dark liquidity sources by enabling retail customers to choose to interact with that liquidity to seek larger-size executions and potentially better prices."

Would one be shocked that the NYSE would be so vocally against Direct Edge when it has the SLP in its back pocket effectively dominating what could be the biggest flash trading market in history? Many more questions remain unanswered, but we hope readers now have a much better sense of the continuing fight against the ever more evident extensive informational advantage that Goldman Sachs may probably have thanks to its monopoly of the SLP program.

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loans's picture

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Anonymous's picture

There is a story with a good moral and it is called:

Goose that laid the golden egg

" A farmer went to the nest of his goose to see whether she had laid an egg. To his surprise he found, instead of an ordinary goose egg, an egg of solid gold. Seizing the golden egg he rushed to the house in great excitement to show it to his wife. Every day thereafter the goose laid an egg of gold; but as the farmer grew rich, he also grew greedy. And thinking of all the eggs that remained inside her, he decided that if he cut the goose open he could have all her treasures at once. He did this, and when he killed the goose he found it empty. "

erich's picture

Very disconcerting.

Gordon_Gekko's picture

A simple and old story but so true! BTW, the goose died last year - they are now just pumping drugs into the dead body of the goose hoping an egg will come out.

Veteran's picture

Fantastic as always.  Thanks

crzyhun's picture

I hate to be a little off topic but not to too much. I fits in tangentially....

Look/search for the "Cloward Piven Strategy." In a phrase it is

...hasten the fall of capitalism by overloading the government bureaucracy with a flood of impossible demands, thus pushing society into crisis and economic collapse.

I know 'cause back in college this was the mantra. Well, guess what? What is all this that is happening if it is not a 'crisis strategy'?

Anonymous's picture

I think we are witnessing the collapse as we speak. While I derive no pleasure in seeing the goings on, I am awestruck that I am witnessing history.

zeropointfield's picture
zeropointfield (not verified) crzyhun Jul 22, 2009 2:43 AM

the target is not capitalism but democracy, incl. rule of law and equality before the law. This only hinders capitalism. China is a much better model.

Capitalism is doing fine at this point. After all, someone IS making big bucks right now. On the other hand democracy doesn't seem to work at all, which is what they set out to demostrate: People just can govern themselves.

End of Enlightenment.


Anonymous's picture

Complicate the frontrunning process by removing specialists/marketmaker, put high performance machines, proprietary software instead of humans and then keep saying "this is not frontrunning, frontrunning is when you have a specialist sitting in the middle, watching orders come in". What a bunch of lies. We as a society are fucked.

Anonymous's picture

My 401k is looking a lot better because of this. The recession is over.


must get out calculator

where is my mind's picture

How often do "competing" flash orders meet and execute? I understand GS is the big dog on the porch.  But, how often would Simmons and GS actually meet and execute an order?  Is that inconsequential?  How large are these flash orders typically?  I know their main role is to mine for the large institutional order and peck them to death or, is it more like constantly issuing a barage of flash orders to get the nature, or context of order flow at any given time, and expoit that for what? A dime?  Maybe less?  Believe me, I understand that in large quantities repeated, how many times a minute, or 5 minutes quickly adds up to serious coin.  Is this why you see the proliferation of 100 share blocks constantly streaming by on the tape, occassionally seeing 10K+ blocks go through?  Does the exchange give rebates on these tiny 100 share blocks?  If so, I can certainly understand why they proliferate so much.  


I'm just trying to get my head around 1: what size would constitute an average trade like this?  2: what is the duration of the trade?  A minute?  Less?


Or, are they just constantly there pinging, executing the small orders constantly and instantly throughout the trading day, maybe taking a penny on a good trade, but mostly just taking the rebate?  How the hell does the NYSE pay this?  That's what I want to know.  And what the hell does Art Cashin do now?  He must have a hammock somewhere.

Anonymous's picture


Anonymous's picture

These super skinny columns are hard to read.

Anonymous's picture

I understand (barely) that there is a latency/proximity issue with getting similar technology and therefore information into the hands of the retail trader. What type of system would somebody need and how close would that somebody need to be to effectively level the playing field (or at least be able to sniff the grass on the field)? I've read on other threads, and they may have been joking, that processor speeds on multiple, linked gaming systems are reaching the speed at which someone could take advantage of the previously mentioned ELP program? I realize the point is to stop this kind of inequity, but in a "...can't beat 'em join 'em" argument for argument's sake someone could possibly benefit from such technology or at least test Mr. Piven's theory?
CAPTCHA gives me an IQ rating of about 12...

Anonymous's picture

Didn't KIm Jong-il try linking up a bunch of Xboxes

GoldmanSux's picture

Speaking of Kim Jong Il, notice the coincidence of Goldman stopping their HFT at the same time as N. Korea is committing cyberwar? KJ Il is a pretty savvy trader from my understanding.

JohnKing's picture

Cell processors. Yes, you could put together a PS3 "farm" and do some serious processing.


Cell is not limited to game systems. IBM has announced a Cell-based blade, which leverages the investment in the high-performance Cell architecture. Other future uses may include HDTV sets, home servers, game servers and supercomputers. Also, Cell is not limited to a single chip, but is a scalable system. The number of attached SPUs can be varied, to achieve different power/performance and price/performance points. And, the Cell architecture was conceived as a modular, extendible system where multiple Cell subsystems each with a Power Architecture™ core and attached SPUs, can form a symmetric multiprocessor system.



Anonymous's picture

Retails cannot join the burglars. That's the whole point of this. Retails are one source of stupid money. Add some fund managers and inexperienced hedge fund managers to the money source.

Anonymous's picture

i think the issue is more one of proximity than
of hardware.

Anonymous's picture

SEC to Reconsider Legality of 'Flash' Orders

Traders Magazine Online News, May 29, 2009

Peter Chapman

lizzy36's picture

Look like S&P living up to the reputation they have been paid for over the last 5 years.

This is unfucking believable. Is their any independence anywhere (rhetorical question, i know)


NEW YORK -(Dow Jones)- In a stunning reversal in its evaluation of a clutch of mortgage bonds backed by commercial property, Standard & Poor's Tuesday raised the ratings on several securities it had downgraded just a week ago.

Among the bonds that have been moved back to the top-notch triple-A category from the triple-B minus category are securities that make up the benchmark GG-10 deal.

The ratings firm said it raised the ratings following the implementation of its "recently updated criteria." An S&P spokesman wasn't immediately available for comment.

The upgrade means that these bonds are now eligible for a Federal Reserve program which offers investors cheap loans to buy them.

Market participants said they are confused by S&P's actions.

"Every time they do this, they erode their credibility as a ratings agency," said Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt.

Gordon_Gekko's picture

"Erode"? WTF? Do they have any left? BTW, whichever "market participants" are "confused" are probably morons.

Anonymous's picture

The wall street government complex knows that us serfs can do nothing. They know that we have a very short term memory and that we will get over all this if they keep repeating green shoots. They know that we are idiots point blank. By we, I mean the voting public. Our choices are choose from this list of gangsters or from the other list of arseholes.
Exactly 2 choices.

NorthenSoul's picture

Upgrading what they downgraded a week ago?

The got some serious 'splaining to do!



deadhead's picture

Do you think it took more than one phone call from the Rahmster?

Gordon_Gekko's picture

"...thanks to its monopoly of the SLP program."


Shouldn't that be "monopoly of the United States"?


BTW Tyler/Marla: sometimes the answer to the captcha is in 3 digits and I get this message "Math question cannot be longer than 2 characters but is currently 3 characters long." Also, could you please make the captcha math problems a bit more tough? My quad-core Xeon computer is able to solve the current ones in a matter of mere hours.

fazfas's picture
fazfas (not verified) Gordon_Gekko Jul 21, 2009 6:08 PM

i get that too

ptoemmes's picture

If you type really really fast and don't wait to hit the Enter/Return key it - sometimes - fits.


Damn I just got one of goes..see ya on the other side.

Anonymous's picture

Since this all seems at the root to be about internalization I thought I would drop that at the NYMEX for options which is still open outcry if you want to cross a trade and take it in house you have to announce it to the pit three times before you can do it giving others a chance to take the other side first, pretty sure markets should work that way/electronic trading is beginning to cause more problems than open outcry did

Anonymous's picture

I was a member of an active NY exchange for over 25 years and traded in the pit daily. For years only Cotton (before merging with the CSCE to form NYBOT) had the "three times" cross trade rule. It was always just easier to bucket the trade, or 90% of it.

Memberships on exchanges are licenses to steal because they are self-regulating entities. Sure, they are many guys who speculate. But how hard is that to do when you are always just risking the customer's money that your own little cabal divied up? What percentage of traders would I say never have to worry about their cards ever being pulled and having a problem found? I'll be very generous today and say 15% are honest men with an ability to maake money aand a desire to be honest. Without the ability to maake money, you turn to a life of crime and the FBI, CFTC, et al are not concerned unless you will be able to deliver a very large fish to them. I'll add that IMO, 50% could easily be convicted of a pattern of trading abuses but the fact is that all that is required of compliance is that you THINK complance (a department with no real teeth) is watching out for corruption.

I had great hope for honest markets when exchanges went electronic. But the crime from upstairs was always there with the "if you want my business you'll let me know your entire book" coming from the big houses. Now, they appear to have certain rights others do not.

Wall Street has always been a den of thieves and will remain so until sich times as the primary character of these pages has people dragged from offices in cuffs and traders sent to jail. Will that haappen? Not in your lifetime or mine.

Invest accordingly!

Karston1234's picture

Amusingly, it is none other than the NYSE's own Larry Leibowitz who raised the most ruckus about the potential abuse of the ELP program. Logo Design | Brochure Design | Website design

NorthenSoul's picture

What's wrong with banning this practice altogether? No more direct colocation of some market participants to the trading floor etc.

Everyone on the same level playing field...see who's the really smart cookie in the jar?


Just asking...

Karston1234's picture

Great work you have done by sharing them to all.
Best logo design | Promo Items Design

whacked's picture

"In one corner was defending champion William O'Brien, CEO of Direct Edge. In the other was Larry Leibowitz, his hot-under-the-collar opponent from the Big Board..."

Now I would have loved to be spectator at that match .. scratching and spitting allowed!

where is my mind's picture

Get rid of the rebates.  Bring back the nickel. Say goodbye to the penny, and the Mariana Trench will look like a kiddie pool.

Anonymous's picture


Anonymous's picture


As for people that actually work. Hahahaaaaaaaaaaaaaaaaa. Suckers. Your getting paid too much too.

Jestocost's picture

Great article

Shouldn't be surprised really as the only way of 'winning'

at HFT table is by cheating and looking at the cards,

unless of course you are the SLP,

in which case you get to deal the cards and play

with somebody elses money at the same time.




Jestocost's picture


Gotta fix the Captcha.

either that or I have to learn how to add again...

KidDynamite's picture

this sounds especially ironic as a complaint coming from the NYSE considering it's basically a modernized version of how the NYSE specialists would verbally quote a market before executing an order - and only the guys standing in the crowd had the option to intervene.

ie, if GE was 11.25-11.27 50k up, and you walked in to sell 50,000 shares, the specialist would say out loud "25c bid 50,000, 50,000 at 26c, SOLD."  If no one interrupted him, the trade was done.  Markets have NEVER been setup such that every participant has the same opportunity to trade on every quote. 

Anonymous's picture

The guys standing in the crowd were members who paid a lot of money for the right to represent customer orders. This is how the auction market worked. Most people who hated it never understood it. Trust me, no specialist ever got away with what goes on today.

Anonymous's picture

Nothing you just said invalidates Kid's points.

Anonymous's picture

What is his point ? His broker didn't know how to protect his orders in the old days ? Did he ever trade on the floor?
Sounds like a very typical "trader" griping that the whole world is shooting against him while he shops his order flow. Very weak.

Anonymous's picture

Kid, quit confusing us with the facts. funny thing is, nobody in the biz who's commenting on flash (in the article) is exposing their real agenda. That's the real story and if TD was any good he'd be pursuing that instead of shouting meaningless phrases to the pitchforks. The true story of why the various entities are aligned the way they are is fascinating. TD is not even close to understanding what's going on here, he's compounding his error of misreading the meaning of HFT in the first place. Although, since the real agenda for TD is driving traffic, he's doing a great job.

Anonymous's picture

I'm curious, though I have a good guess, of what the real agenda of this pissing contest is. Obviously there's a fight for market share among the exchanges, and for some, not to become extinct.

Then mix into it the competition among tech providers and you have a dirty race.

Then the SEC as usual is not trying to play favorites, so it remains on the sidelines.

If someone could clearly articulate the public interest in this issue to the SEC, something could be done. But it's something far removed from the public's understanding.

At this point the pitchforks think this has something to do with Goldman Sachs, but that's far from what this is about.

Gwaihir's picture

The value of your, well, contribution, would be higher if you were to share your insights with others and not only throwing mud at those "not even close to understanding".


Anonymous's picture

one insight is that there is no free lunch, not even for the evil HFTers. Another was already stated, that TD is driving web traffic, and doing a magnificent job. We're in the era of populist rage, and this is as good a flashpoint as any. Off with their heads!

Clusterstock did a nice service today by publishing the complete Themis Trading paper. Themis is open and notorious in explaining that their aim is to break up large size in a deceptive way to fool the other side into accepting a price that is not consistent with the true value. The true value, that is, given the real size that's being pushed into the market. Now I don't know about you, but in my experience, there is no market, financial or otherwise, anywhere in the world, at any time in human history, where large size didn't move the market. There's nothing wrong with trying to avoid this phenomenon, when you are the self-interested party. Legal, expected, etc. No big deal. What I do find wrong is to be thwarted in your attempts to fool the market, and then whine loudly to the pitchforks that the game is rigged and you are getting screwed. That this has gotten more than a passing mention in otherwise excellent blogs is truly amazing to me. Yes, the HFTs are enjoying the Themis Trading's of the world for lunch. Themis brings a knife to a gun fight.

One last insight: when a Themis has large size to move, they are still but a small fraction of all the trading going on at the time they trade. If the HFTs, by their actions, adjust the price so that it is more consistent with the knowable information about the Themis size, then all the other entities trading, on either side of the trade, receive a more accurate price, given what's knowable, including what's knowable by high speed computer analysis of publicly available order information. And yes, this information is publicly available, in the commercial sense. So the final result is merely prices that more accurately reflect what's knowable at the time of a trade. This helps, not hurts, the little guy.

Ben_the_Bald's picture

Fascinating stuff. Keep it coming.

But sometimes I wonder what really drives more traffic to these blogs. I've almost figured this one out, but I'll save that for another forum.