Now and then, I talk about how having market professionals interact on a physical trading floor (as well as interacting electronically) not only helps price discovery but also provides a needed check against trading errors. A perfect example of this occurred this morning.

My colleagues tell me that shortly before the opening, a customer erroneously sent tens of thousands of orders in a lightly traded security — one that on average trades fewer than 1,000 shares a day on NYSE. Had our market been completely electronic, those orders would have just ripped though the stock, taking the price down until the mistake was discovered later, then probably being cleaned up with hundreds or thousands of trade cancellations.

Instead, on NYSE, a designated market maker spotted the aberrant orders before he opened the stock, and we held the opening until the firm could be contacted and the orders cancelled, without a single aberrant order being executed here. The security opened within the hour with no price impact.

When you’re a primary listing market, it’s helpful to have the added feature of human beings with affirmative obligations for ensuring fair and orderly markets, adding liquidity and a watchful eye when needed.

Hat tip to Frank DeGarcia, Todd Abrahall and Nick Brigandi for filling me in on this.

From Todd Wilemon: Every day this week, we are going to explain one of the four new order types coming to NYSE Arca Options on Aug. 24, 2009. So be sure to read this blog each day to get an in-depth look into the characteristics and how these order types will function in the market.

Are you tired of generating massive amounts of cancels in your high-frequency trading?

Do you wish there was a way to keep an order on NYSE Arca Options book providing liquidity and receiving the rebate when the order trades rather than having it route to other exchanges that cost money?

Do you want more free lunches?

Good news, I can help you with the first two. If you figure out the free lunch part, please e-mail me!

Commencing on Aug. 24, 2009, NYSE Arca Options will begin accepting PNP Blind orders. PNP Blind stands for “Post No Preference — Blind.” (The lingo for those in the know is PNP B.) This order type has been a big success on the equity side and NYSE Arca Options is delighted to add it to the suite of unique order types we offer to our options participants.

PNP Blind orders are limit orders that do not route. These orders will always stay on the NYSE Arca Options exchange. The PNP Blind execution instruction can apply to any limit price order.

What, you might ask, is so amazing about this order type? Allow me to do a little singing. (Don’t worry, I’m not actually going to sing a song, just sing the praises of PNP B.) Although if we ever get this blog wired for sound, you are in for a treat! But I digress… PNP B orders allow participants to utilize the PNP (do not route) execution functionality while reducing the number of cancels generated. A regular PNP order will cancel back to the user when an incoming order can not be filled in its entirety on NYSE Arca. Here’s the added bonus for PNP B users: If upon receipt, a PNP Blind order locks/crosses an away market: it will first trade any available size at the NBBO (National Best Bid or Offer) on NYSE Arca and then go blind, rather than cancel back to the firm. It will never route out. So once the PNP Blind order exhausts all available volume on NYSE Arca, the order goes blind (i.e. is not displayed to avoid locking the market but remains in the system available for execution) at the lock price and remains blind until the NBBO unlocks. And while blind, if a contra sided order or quote arrives at NYSE Arca, the PNP B will still receive a posting credit. Pretty cool, huh?

If a PNP Blind order is blind due to a locked NBBO and the NBBO subsequently changes so it is no longer locking the PNP B order, it will disseminate to OPRA. Similarly, if an incoming PNP Blind order is not marketable against an away BBO (Best Bid or Offer) upon receipt, if marketable on Arca, it will trade against any resting interest on Arca and the remainder will post to the NYSE Arca consolidated book and disseminate to OPRA. If not marketable, the PNP B order will post and disseminate to OPRA.

Once posted and disseminated, the PNP Blind order will stand its ground, i.e. it will not go blind if locked/crossed by an away BBO; it will disseminate to OPRA and not go blind again under any circumstances.

Now I know some of you have been waiting for the technical aspects of PNP Blind orders. All you English majors can step out for a cup of coffee.

PNP B orders will be accepted via FIX and ArcaDirect. PNP B orders will be identified by populating FIX Tag 9417 (extended PNP) with “B.” For ArcaDirect, Extended PNP will be populated with “B”

Let us review the rules of PNP Blind order one more time. These orders do not route; they only trade on NYSE Arca. They are only limit orders. If a PNP B, upon receipt at Arca, locks/crosses an away market on NBBO, it will first trade all the size (if any) on Arca that is equal to NBBO and then will go blind, rather than cancel back to firm. Non-marketable PNP B orders will post to the book. Once posted, when a quote from another market locks or crosses a PNP B order on Arca, the PNP B order stands its ground and does not go blind.

OK, now you are ready for the quiz. Silly me, there is no quiz!

However, if you have any questions regarding this new order type or any other order types please contact your Relationship Manager at relationshipmgt@nyc.com or call the options trade desk at 877-729-7291. See you tomorrow.

Trade ‘em Up!

TW

From Marisa Ricciardi: On Tuesday, August 11, The Walt Disney Company (NYSE: DIS) visited NYSE to celebrate the 10th anniversary of their ABC smash hit Who Wants to Be a Millionaire. Television personality and Millionaire host Regis Philbin marked this special occasion by ringing the Closing Bell. The following morning Regis dished about his NYSE experience on ABC’s Live with Regis and Kelly. Check out the video clip above for Regis’ comical coverage of the day’s events. We promise he was not harmed during the traditional Closing Bell banging of the gavel!

Reuters reports from Brazil today:

* NYSE expects 20 IPOs in 2009, up from 15 so far

* Company encouraged for 2010 IPOs on filings backlog

* NYSE CEO says high-frequency trades should be encouraged

More details in the article, linked above.

Reuters reports from Brazil today:

* NYSE expects 20 IPOs in 2009, up from 15 so far

* Company encouraged for 2010 IPOs on filings backlog

* NYSE CEO says high-frequency trades should be encouraged

More details in the article, linked above.

From Marisa Ricciardi: He may be known as a four-time World Series Champion and five-time All Star during his career with the New York Yankees, but these days Bernie Williams is celebrating a #3 ranking on the Billboard charts. On Monday, August 10, Bernie Williams visited the NYSE to ring the Closing Bell and to celebrate the success of his smooth jazz radio single “Go For It” off the track of his second album, Moving Forward. The former Yankee was greeted with cheers from the trading floor, signed memorabilia and posed for photos with fans.

From Marisa Ricciardi: He may be known as a four-time World Series Champion and five-time All Star during his career with the New York Yankees, but these days Bernie Williams is celebrating a #3 ranking on the Billboard charts. On Monday, August 10, Bernie Williams visited the NYSE to ring the Closing Bell and to celebrate the success of his smooth jazz radio single “Go For It” off the track of his second album, Moving Forward. The former Yankee was greeted with cheers from the trading floor, signed memorabilia and posed for photos with fans.

From Todd Wilemon:

“The times they are a’ changing…”

Regulation NMS, the National Market System, has been around since 1975. Congress directed the SEC to facilitate the establishment of a national market system (NMS) to link together the individual markets that trade securities. Developing a national market system is in the public interest to protect investors and maintain fair and orderly markets to assure fair competition among exchange markets.

Options exchanges set up a plan in 2000 to comply with Reg NMS. Before 2000, most options were listed only on a single exchange, hence why we did not come up with our own NMS for twenty-five years. In this plan, exchanges agree that the dissemination of locked or crossed markets should be avoided and if members lock or cross a market, they should take action to unlock or uncross these markets. A locked market means a quoted market in which a bid is equal to the offer or vice versa. A crossed market means a quoted market where the bid is higher then the quoted offer or an offer is lower than a quoted bid.

Under the current plan, the OCC, along with all option exchanges, created a “Linkage Hub” that is run by the OCC, Options Clearing Corporation. The Linkage Hub is a centralized data communications network that electronically links the option exchanges to one another and helps participants to route orders to limit trade-throughs.

Come Monday, Aug. 31, 2009, options markets will transition from the linkage hub to direct order routing. That is where the ISO comes in. Let me introduce the ISO. ISO stands for intermarket sweep order which will allow exchanges to route orders to other markets directly instead of having to send them through a central hub. Equity markets have already transitioned to a Reg NMS compliant system that uses ISO orders.

The Intermarket sweep order is an IOC (Immediate or Cancel) order. IOC orders are limit orders that are executed in whole or part as soon as the order is received and any portion not executed will be immediately canceled.

To prevent trade throughs, ISO orders will be routed to exchanges where the “protected bid” is superior to the sell order limit or the “protected offer” is superior to the limit price of a buy order. “Protected bid or offer” means a bid or offer that is displayed by an exchange, disseminated pursuant to the Options Price Reporting Authority (OPRA) and is the Best Bid or Best Offer (BBO) of the exchange.

Clients can send ISO orders to several exchanges simultaneously to fulfill their obligation to prevent trade throughs, or as an alternative, clients can send a non ISO order to one exchange and have the exchange send out ISO orders to clear the away BBOs.

Here’s some technical jargon just in case you are impressed by this sort of thing:

The ISO order type will be indicated in FIX tag 18 with the value “f”.
The ISO order type will be reported to OPRA with a special ISO trade qualifier (Type code “S”).

• And here is how the ISO will work:
o An inbound ISO order type received on NYSE Arca or NYSE Amex
– Will ignore the NBBO.
– Will never route to another exchange
– Will trade vs. the existing depth of book
* Any remaining volume of the ISO order will cancel back to the sending firm.

• Clients can of course still send non ISO orders. If there are better markets away when a non ISO order is received, the ISO order type will also be used by NYSE Arca and NYSE Amex when routing orders to away exchanges.
o Outbound ISO orders will always have a TIF of IOC
o Outbound ISO orders will be sent for the lesser of the ISO order volume or the size of the displayed volume at the away BBO
o Outbound ISO orders will be sent contemporaneously to trade all available top of book size on away exchanges (up to size of the incoming order) regardless of NBBO
o Once the ISO orders have been sent to clear the away BBOs at the time of the order’s receipt, the order will access depth of book, up to the order’s limit price.

Most important to you, NYSE Arca Options and NYSE Amex Options are ready for our Trading Permit Holders who wish to test ISO orders in the CERT environment to do so immediately. Contact our Connectivity Hotline at (888) 689-7739 or email to connectivity@nyx.com. By testing in our CERT environment, you get peace of mind and you can be assured that when the change happens, your firm is ready.

For those readers that would like to see a full copy of the plan, please visit the SEC website here to read all about it: http://www.sec.gov/rules/sro/nms/2009/34-60405.pdf

Trade ‘em Up!

TW

From Marisa Ricciardi: Today nyse magazine achieved two milestones –the release of its 50th issue and the results of its fifth annual CEO survey, the NYSE Euronext 2010 CEO Report. For the first time both are available digitally via a dedicated website: www.nysemagazine.com.

For nearly a decade, the magazine has showcased the business ingenuity, best practices and lessons learned of prominent business leaders, including GE’s Jack Welch, Xerox’s Anne Mulcahy, Sybase’s John Chen and Visa’s Joseph Saunders. This issue continues to deliver, with insights from more than 284 CEOs spanning 23 countries and 24 industries. The report serves as an annual touchpoint on CEOs’ impressions on the economy and how they’re adapting business to succeed and lead in the evolving marketplace. From New York Community Bank Corp.’s Joseph Ficalora on why his company declined TARP funds to Merck’s Richard Clark on rebuilding a company’s reputation to Mead Johnson Nutrition’s Stephen Golsby on the recession’s silver linings, this issue is rich in content and experience. We’re excited to extend the conversation online and welcome your feedback.

The wall Street Journal’s MarketBeat blog today posted “More Citi Not Merrier for NYSE, Nasdaq,” and I had a different take on the issue, which I just posted on that blog and will re-play here.

First, an excerpt from MarketBeat:

For all the touting of the massive volume in Citigroup shares last week — and the record–breaking single trade of 347 million shares — the New York Stock Exhange and Nasdaq got little benefit. About half the trading, in fact, was done off the big exchanges.

Broker-dealers had already matched buyers and sellers for nearly half the Citi trades, which is vastly more than the average of about a quarter of all trades for NYSE-listed stocks, according to the folks at Sandler O’Neill.

And exchanges can’t claim trades that they don’t match themselves.

With so many more Citigroup shares being traded, and nearly half of them coming to the exchanges already matched, the NYSE and Nasdaq both took a hit to market share in the early part of August.

Here’s my take:

Donna — I’m in the NYSE Euronext press office and respectfully would like to offer a different perspective on the statement that the New York Stock Exchange “got little benefit” from the growth in Citigroup’s volume.

Our Citigroup volume has tripled between July and August. In August, the NYSE has traded about 215 million C shares a day. That’s a lot of shares, and our revenues are based on shares traded, not market share.

Citi had been accounting for between 3-6% of NYSE volume in 2009, but in August it has come to account for 16%. That’s a significant growth and contribution to our total share volume.

None of this is to dismiss market share as an issue. We fight and compete hard for every order, and we remain the over all market leader for trading in our listed issues. But market share has to be viewed in context. In a hyper-competitive business such as ours, you have to focus on the fact that the total pie is much larger, not just that you have a slightly smaller percentage of it.

Thanks. –Ray

Hat tip to my colleague Ann Price in Strategic Market Analysis for the numbers I cited.