Subject: File No. Equity Market Structure 2013
From: Joseph Saluzzi
Affiliation: Partner, Themis Trading, LLC

October 12, 2013

Websters dictionary defines the word hidden as not seen and not easily found or recognized.

This same definition however has somehow escaped eight of the 13 stock exchanges. These stock exchanges have decided that releasing information on their clients hidden order flow to their proprietary data feed clients is an acceptable business practice. While we have always known that exchanges were doing this (you may remember our May 2010 white paper Data Theft on Wall Street), we have not focused on the extent of this leakage until the SEC Market Structure website detailed the hidden order information. The SEC is able to identify trades against hidden orders with their new MIDAS system because exchanges have been identifying this information for their data feed clients. The SEC website illustrates that the percentage of trades that are executed against hidden orders on these eight exchanges range from 8% to 17% per exchange. According to the SEC, the exchanges that release information on trades that execute against hidden order flow are ARCA, BATS-Z, BATS-Y, EDGA, EDGX, NASDAQ, NASDAQ PHLX and NASDAQ BOST.

We were quite shocked to see that the SEC readily acknowledged the fact that exchanges were giving out information on trades that were executed against hidden orders. The SEC stated on their Market Structure website :

We use the term Hidden Trades to mean trade executions on an exchange that are the result of a marketable order matching an undisplayed, or hidden, resting order. By definition, the exchange feeds do not provide messages related to the addition of undisplayed orders, but many provide an indicator or other method for identifying when trade executions (which are not themselves hidden) were based on an otherwise hidden order.

While not explicitly identifying hidden orders, the data feeds are providing ways to reengineer the order book and decipher if there is a large buyer or seller. The reason why most investors enter hidden orders is because they want the least amount of information about their order to be displayed. While we have always taken steps to safeguard our clients order flow from this type of data leakage, we wonder how many investors dont even realize that their orders have been subject to this egregious leaking of information.

With todays trading strategies enabled by ultra-high resolution data feeds, we believe the data mechanism is fundamentally flawed. Trades and quotes are linked together for efficiency purposes, to reduce the number of messages sent in real-time, but we believe this convenience factor is the root of information leakage and has gone too far. We believe the only fair mechanism is for exchange data feeds to de-link trade information from quote information, making this linkage only available on a T+1 basis, if at all. This would be an important step towards rectifying a key issue that has plagued the markets.

Exchanges are breaching the confidentiality and trust of their own clients by including information on their data feeds about trades that have interacted with hidden orders. We think that the SEC should immediately require exchanges to remove any information about hidden orders from their data feeds.