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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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Tue, 07/21/2009 - 16:27 | Link to Comment Anonymous
Fri, 06/03/2011 - 04:47 | Link to Comment loans
loans's picture

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Tue, 07/21/2009 - 17:03 | Link to Comment Anonymous
Tue, 07/21/2009 - 17:12 | Link to Comment erich
erich's picture

Very disconcerting.

Tue, 07/21/2009 - 19:19 | Link to Comment Gordon_Gekko
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.

Tue, 07/21/2009 - 17:08 | Link to Comment Veteran
Veteran's picture

Fantastic as always.  Thanks

Tue, 07/21/2009 - 17:10 | Link to Comment erich
erich's picture


Tue, 07/21/2009 - 17:31 | Link to Comment crzyhun
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'?

Tue, 07/21/2009 - 17:40 | Link to Comment Anonymous
Wed, 07/22/2009 - 03:43 | Link to Comment zeropointfield (not verified)
Tue, 07/21/2009 - 17:48 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:05 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:06 | Link to Comment where is my mind
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.

Tue, 07/21/2009 - 18:32 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:20 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:26 | Link to Comment Anonymous
Tue, 07/21/2009 - 19:07 | Link to Comment Anonymous
Tue, 07/21/2009 - 19:22 | Link to Comment GoldmanSux
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.

Tue, 07/21/2009 - 19:21 | Link to Comment JohnKing
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.



Tue, 07/21/2009 - 19:34 | Link to Comment Anonymous
Tue, 07/21/2009 - 22:37 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:29 | Link to Comment Anonymous
Tue, 07/21/2009 - 18:44 | Link to Comment lizzy36
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.

Tue, 07/21/2009 - 19:10 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

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

Tue, 07/21/2009 - 20:09 | Link to Comment Anonymous
Tue, 07/21/2009 - 19:18 | Link to Comment NorthenSoul
NorthenSoul's picture

Upgrading what they downgraded a week ago?

The got some serious 'splaining to do!



Tue, 07/21/2009 - 19:33 | Link to Comment deadhead
deadhead's picture

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

Tue, 07/21/2009 - 19:02 | Link to Comment Gordon_Gekko
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.

Tue, 07/21/2009 - 19:08 | Link to Comment fazfas (not verified)
Tue, 07/21/2009 - 21:12 | Link to Comment ptoemmes
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.

Tue, 07/21/2009 - 19:12 | Link to Comment Anonymous
Wed, 07/22/2009 - 10:10 | Link to Comment Anonymous
Wed, 12/01/2010 - 01:34 | Link to Comment Karston1234
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

Tue, 07/21/2009 - 19:21 | Link to Comment NorthenSoul
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...

Wed, 12/01/2010 - 01:35 | Link to Comment Karston1234
Karston1234's picture

Great work you have done by sharing them to all.
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Tue, 07/21/2009 - 19:23 | Link to Comment whacked
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!

Tue, 07/21/2009 - 19:30 | Link to Comment where is my mind
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.

Tue, 07/21/2009 - 19:46 | Link to Comment Anonymous
Tue, 07/21/2009 - 19:49 | Link to Comment Anonymous
Tue, 07/21/2009 - 21:02 | Link to Comment Jestocost
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.




Tue, 07/21/2009 - 21:03 | Link to Comment Jestocost
Jestocost's picture


Gotta fix the Captcha.

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

Tue, 07/21/2009 - 21:08 | Link to Comment KidDynamite
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. 

Tue, 07/21/2009 - 23:23 | Link to Comment Anonymous
Wed, 07/22/2009 - 06:57 | Link to Comment Anonymous
Wed, 07/22/2009 - 12:05 | Link to Comment Anonymous
Wed, 07/22/2009 - 02:25 | Link to Comment Anonymous
Wed, 07/22/2009 - 07:11 | Link to Comment Anonymous
Wed, 07/22/2009 - 07:17 | Link to Comment Gwaihir
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".


Wed, 07/22/2009 - 09:55 | Link to Comment Anonymous
Wed, 07/22/2009 - 11:55 | Link to Comment Ben_the_Bald
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.

Tue, 07/21/2009 - 21:10 | Link to Comment Anonymous
Tue, 07/21/2009 - 22:51 | Link to Comment Anonymous
Tue, 07/21/2009 - 23:25 | Link to Comment Milton
Milton's picture

Sorry, I'm not ready to buy into this. I think the programmed trades are able to make money because they can execute orders on equities faster than enyone else in response to the s&p futures.

Tue, 07/21/2009 - 23:47 | Link to Comment Anonymous
Wed, 07/22/2009 - 02:25 | Link to Comment 3Gonads
3Gonads's picture

 I long for the days when the man with the fastest homing pigeon had the edge.


 1 ms is too close to zero for my taste.

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Fri, 07/24/2009 - 22:40 | Link to Comment Anonymous
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