Toronto-based TSX Inc. is seeking regulatory approval for new long-life order designed to reward traders that aren’t competing based on speed in an effort to deal with persistent concerns about the impact of high-frequency trading (HFT) on market quality.
TSX issued proposals on Thursday spelling out its plans for a new, so-called “long-life order” type that aims to help ordinary (non-HFT) retail and institutional investors by rewarding liquidity that remains committed for a minimum period of time. These long-life orders will be required to rest the order book for at least one second. In return for providing committed liquidity, the orders will receive execution priority over orders at the same price that are not long-life orders.
“By choosing to use the long-life order type, natural investors, their dealers and other non-latency sensitive participants will be able to participate in the markets more effectively and confidently and better achieve priority in the book without having to compete on speed,” the TSX says in its proposals. “Expected benefits of the order type include higher fill rates for natural passive orders, higher fill rates for active orders due to better reliability of the displayed quote, and a reduction in short-horizon fleeting liquidity, unnecessary intermediation and message traffic.”
The TSX notes in its proposal that the one-second duration should be immaterial to traders that are not speed sensitive, but would be significant for HFTs and should discourage orders that are only entered for an extremely short time. “The objective of the new long-life order type is to enhance the quality of execution for natural investors and their dealers — both retail and institutional — by rewarding those willing to commit liquidity to the book for a minimum period of time,” it says.
The TSX first put forth the proposals in a paper published last autumn that outlined a series of market structure changes that TSX is planning to address, including the effects of HFT on market quality and fairness.
In addition to the introduction of the new order type, the TSX is also proposing to revise the treatment of odd-lot orders so that they execute at the national best bid or offer (NBBO) in a bid to achieve better quality execution for auto-executed odd lots. “This change is a result of significant demand from participants routing retail order flow to TSX,” it says, noting that competing marketplaces are already providing the ability to offer odd lot executions at the NBBO.
The amendments are expected to become effective in November. Comments on the proposals are due by June 22.