What a game! NY Jets Chairman and CEO Woody Johnson, along with EVP and GM Mike Tannenbaum, Head Coach Rex Ryan and former Jets player Curtis Martin, visited the NYSE on Monday, July 20 to ring The Closing Bell. 2009 touches down as a “Golden Era” for the NY Jets, marking the 50th anniversary of the franchise that began as the Titans of New York in 1960.

An alleged market fraud by a Kuwaiti financier — who was later found dead — received a good deal of attention in the press last week, including articles in the New York Times among others. But this Reuters article offers something the others did not: a look behind the scenes at how the alleged scheme was uncovered, and how NYSE Regulation and the Securities and Exchange Commission moved quickly to halt it.

Excerpt:

Early on July 20, an individual investor called to tell regulators at the exchange he had purchased shares of Harman International Industries Inc on news reports it was the target of a takeover — reports on some smaller websites that the caller was starting to question.

NYSE Regulation, the oversight body that provided this account, said the tip reinforced suspicions about trading activity that in-house surveillance tools were picking up related to Harman shares, which jumped at least 33 percent before markets opened that Monday morning.
NYSE’s market police then scoured news on the listed company, and called it when the source of the takeover report was not immediately clear. The company knew nothing about such reports, and, just before U.S. markets opened, issued a public statement saying so.

With financial markets digesting the statement — and mainstream media starting to connect the dots to unusual faxes some outlets received on the weekend — NYSE Regulation contacted the U.S. Securities and Exchange Commission to help it identify where the market-moving news came from.

In an interview, NYSE Regulation said it then checked the tape for recent trading in Harman shares, and quickly identified a short list of brokerages that made large purchases, and sold the shares at handsome profits on Monday.

“This was a good old rumor manipulation case,” said John Malitzis, executive vice president of market surveillance at the arms-length oversight body. “Somebody issues an unsubstantiated rumor … and does so in order to benefit from the impact that that rumor will have on the stock price.”

Staff “did some quick and dirty detective work, closely with the Commission’s enforcement staff, to address the potential fraud here,” he told Reuters.

The rest is a tale of fast followup to interrupt the scheme before the trades settled and ill-gotten profits could disappear. Here is the SEC’s announcement of the case, which is still ongoing.

PS — The Reuters piece today was picked up by the Times’ DealBook blog.

SpongeBob and friends visit NYSE.

Anniversary sponge cake, anyone?

From Marisa Ricciardi: Who left his pineapple under the sea to drop on the deck of the NYSE? Well, it was none other than SpongeBob SquarePants, who brought his own nautical nonsense to the Trading Floor on Wednesday, July 15.

SpongeBob SquarePants airs on Nickelodeon, a subsidiary of Viacom (NYSE: VIA, VIA.B) and has been the number-one animated program with kids age 2-11 for more than seven consecutive years.

From Todd Wilemon: New order types are coming to the NYSE Arca Options Exchange in August.

This is a friendly reminder for trading firms about the new order types coming to your favorite options exchange. Have you allocated the resources to code for these order types? Do you know the four new order types and how they interact in the marketplace? Here is your “un-official” official heads up! Keep reading for all the juicy details.

NYSE Arca Options is expanding the list of PNP orders that can trade on our exchange. Post No Preference (PNP) orders stay on NYSE Arca and do not route out to other exchanges. Since we will pay you to trade on NYSE Arca whenever you post liquidity, these orders ensure you stay here and do not route to other high-cost exchanges.

Post No Preference Blind (PNP B)
PNP B orders are limit orders that do not route. If, upon receipt, a PNP B order locks/crosses on an away market, it will first trade any available size at the National Best Bid or Offer (NBBO) on NYSE Arca and then go blind, rather than cancel back to the firm. Non-marketable PNP B orders will post to the book and disseminate to OPRA. (OPRA is the Option Price Reporting Agency, which provides last sale and current option market quotations from all exchanges.) Once posted, the PNP B order stands its ground and does not go blind if locked/crossed by an away Best Bid or Offer (BBO.)

I know what you are about to ask: “Is there going to be a test on this?” You have been asking that question since second grade. Good news: the answer is “no!”, but if you are not coded and ready by August, you will miss out on some good trading opportunities.

PNP Light Only (PNP LO)
PNP LO orders do not route. If NYSE Arca is not at the NBBO upon receipt of PNP LO, the order cancels back to the firm. PNP LO orders also cancel if the order is marketable against any interest that is not disseminated to OPRA, e.g. resting PNP B orders (if PNP B is in blind state), the hidden portion of reserve orders, or any other type of non-displayed liquidity. Non-marketable PNP LO orders will post to book and follow standard order processing. If the PNP LO order trades on receipt (when the order is sent to the exchange) it will be charged a liquidity removing fee.

Adding Liquidity Only (ALO)
ALO orders are limit orders only, with Time in Force of day and never take liquidity or route to other markets. These orders are to be posted to the book in the event that they add liquidity. If an ALO order is marketable upon receipt, (against NYSE Arca orders or an away BBO), it will cancel back to the sending firm. Reserve ALO orders will also be supported. A Reserve Order is a limit order for which a portion of the volume is to be published (displayed) when it is or becomes the Exchange’s best bid or offer, and for which a portion of the volume is not displayed, i.e., is in “reserve” until the displayed portion has been fully decremented.

PNP Plus Complex (PNP+ Complex)
PNP+ Complex orders guarantee the sender price improvement over the screen markets. Upon receipt, our matching engine will validate the price of a PNP+ Complex order against the leg markets and if the order is marketable against these leg markets or would post to the book at a price less than 1 MPV (minimum price variation) away from one of the leg markets, the order will price back one MPV from the derived (net price) BBO and post to the complex order book.

The smallest MPV will be used when multiple MPVs are involved, i.e. if one leg trades with a .05 MPV and another leg trades with a .10 MPV, the complex order will post at a price that is priced back .05 in price.

Take a quick breather with me here…whew, ok! Here is the best part:

If leg markets improve so a resting PNP+ Complex order is marketable, the PNP+ Complex order will price back one MPV and repost. If the leg markets worsen, the PNP+ Complex order will repost at the more aggressive price, always remaining one MVP distance from the leg markets. PNP+ Complex orders will track the screen markets to both better and worse prices, always maintaining a one MPV buffer. If an incoming marketable contra sided PNP+Complex order is received, it will immediately trade against the posted order, as long as the trade will occur 1 MPV away from either side of the complex BBO.

In a nutshell, this means you are ALWAYS guaranteed price improvement over the screen markets, with a dynamic order type that keeps you in the market at an aggressive price!

Those are your four new order types for your trading pleasure and profit. As Walter Cronkite would say back in the day, “and that’s the way it is.”

For further information and also the specific FIX tags and ArcaDirect designations, please refer to our July 2009 U.S. Options Market Update found here:

For additional information regarding order type behavior, please contact: Amy Farnstrom; afarnstrom@nyx.com; (415) 393-4297.

Trade ‘em Up!

TW

Beautiful and multi-talented Samantha Harris visited The New York Stock Exchange July 21, 2009 to ring The Opening Bell® in celebration of her Broadway debut in the starring role of Roxie Hart in the Tony Award-winning hit musical “Chicago” for a six-week limited engagement through August 16, 2009.

From Marisa Ricciardi: It was lights, camera, action from the moment the glamorous primetime TV correspondent and fill-in anchor of CBS’ “The Insider” and co-host of ABC’s “Dancing with the Stars” entered the historic Boardroom of the NYSE. Although nervous about the actual ringing of The Opening Bell®, Ms. Harris managed to hit her mark, find her light and open the market with a rally, making quite an impression for her Wall Street debut. Congratulations Samantha and have a great run!

Larry Leibowitz, our group executive VP in charge of U.S. Markets and Global Technology, spoke with CNBC earlier today to clarify the issues and our position concerning “flash” orders, high-frequency trading and co-location of servers. Again, recommended.

In the above video, CNBC’s Bob Pisani speaks with Jonathan Corpina, senior managing partner of Meridien Equity Partners Inc., and Lou Pastina, NYSE Euronext’s executive VP in charge of NYSE Operations.

You might have read in Traders magazine about NYSE Euronext’s plans to renovate the trading floor, replacing cramped broker booths with modern trading desks, new screens and workspaces, and a new network. Here’s CNBC’s report on the same subject.

The NYSE trading floor is a great place for a community of agents, and the idea is to make it the most attractive place to represent customers no matter what market you’re working, no matter whether you’re working an order electronically or physically or both. And I mean attractive in the sense of functionality, flexibility, aesthetics, access to liquidity, and costs.

The video is 3 1/2 minutes; recommended.

In the above video, CNBC’s Bob Pisani speaks with Jonathan Corpina, senior managing partner of Meridien Equity Partners Inc., and Lou Pastina, NYSE Euronext’s executive VP in charge of NYSE Operations.

You might have read in Traders magazine about NYSE Euronext’s plans to renovate the trading floor, replacing cramped broker booths with modern trading desks, new screens and workspaces, and a new network. Here’s CNBC’s report on the same subject.

The NYSE trading floor is a great place for a community of agents, and the idea is to make it the most attractive place to represent customers no matter what market you’re working, no matter whether you’re working an order electronically or physically or both. And I mean attractive in the sense of functionality, flexibility, aesthetics, access to liquidity, and costs.

The video is 3 1/2 minutes; recommended.

Media coverage continues to grow on the issue of certain marketplaces holding up orders and giving certain members a look at those orders before they are executed, a problematic practice covered in this space here, here, here and here.

Miranda Mizen, a principal at Tabb Group, last week published a commentary, “The Problem with Exchange Giving Their Members Dark Looks”. My main takeaways from it:

• “There used to be a general market dislike of the ability for specialist’s algorithms to see orders destined for the NYSE, and there was a round of applause when the market structure was changed. In the case of the NYSE, orders were not being systematically held up, but the concept of a first look (with no guarantee of a match) found disfavor with the buy side as it gave the perception of inequality at an exchange…” Yet, other markets have re-created “the look,” and to boot they have added holding up orders, and they don’t even have the specialist’s market-making obligations.

• Dark looks benefit the recipient and the venue; the order sender is only a potential beneficiary, the sender may miss the market.

• …”[I]t is unclear where the responsibility now lies to monitor the behavior of those who receive dark looks to ensure order flow is not gamed.”

• Dark looks could erode the quality of the quote by discouraging order display and tight quotes. They could also divide the market into multiple tiers. “An order that sets the best price may move from being rewarded to being taken advantage of, while incoming orders will run the gauntlet of information leakage as they hit computers whose job it is to react to information.”

Traders Magazine’s recently ran the comprehensive “Flash Point” by Nina Mehta. Excerpt:

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.

Jamie Selway, managing director at institutional broker White Cap Trading, believes that flash orders undermine aspects of Reg NMS, including the requirement that brokers and exchanges avoid locked markets. A locked market occurs when a protected bid equals a protected offer. “Firms are locking the market by design, but not by the SEC’s definition,” Selway said. “The problem with the way the SEC has architected this exception to quoting requirements is that it’s now a private locked market instead of a public locked market. This kludge of a half-second definition is brand new.”

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.

And today, Charles Duhigg of the New York Times has “Stock Traders Find Speed Pays, in Milliseconds”. The article is mostly about high-frequency trading, but notably, flashing order information is at the heart of the article’s central anecdote:

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Media coverage continues to grow on the issue of certain marketplaces holding up orders and giving certain members a look at those orders before they are executed, a problematic practice covered in this space here, here, here and here.

Miranda Mizen, a principal at Tabb Group, last week published a commentary, “The Problem with Exchange Giving Their Members Dark Looks”. My main takeaways from it:

• “There used to be a general market dislike of the ability for specialist’s algorithms to see orders destined for the NYSE, and there was a round of applause when the market structure was changed. In the case of the NYSE, orders were not being systematically held up, but the concept of a first look (with no guarantee of a match) found disfavor with the buy side as it gave the perception of inequality at an exchange…” Yet, other markets have re-created “the look,” and to boot they have added holding up orders, and they don’t even have the specialist’s market-making obligations.

• Dark looks benefit the recipient and the venue; the order sender is only a potential beneficiary, the sender may miss the market.

• …”[I]t is unclear where the responsibility now lies to monitor the behavior of those who receive dark looks to ensure order flow is not gamed.”

• Dark looks could erode the quality of the quote by discouraging order display and tight quotes. They could also divide the market into multiple tiers. “An order that sets the best price may move from being rewarded to being taken advantage of, while incoming orders will run the gauntlet of information leakage as they hit computers whose job it is to react to information.”

Traders Magazine’s recently ran the comprehensive “Flash Point” by Nina Mehta. Excerpt:

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.

Jamie Selway, managing director at institutional broker White Cap Trading, believes that flash orders undermine aspects of Reg NMS, including the requirement that brokers and exchanges avoid locked markets. A locked market occurs when a protected bid equals a protected offer. “Firms are locking the market by design, but not by the SEC’s definition,” Selway said. “The problem with the way the SEC has architected this exception to quoting requirements is that it’s now a private locked market instead of a public locked market. This kludge of a half-second definition is brand new.”

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.

And today, Charles Duhigg of the New York Times has “Stock Traders Find Speed Pays, in Milliseconds”. The article is mostly about high-frequency trading, but notably, flashing order information is at the heart of the article’s central anecdote:

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.