Improving the Handling of Limit Orders
Listed below are the Staff's recommendations for improvements to limit order display for market makers, specialists and other traders, as well as recommendations to SROs to enhance their surveillance and disciplinary programs.
Supervision of Limit Order Display
- Firms should enhance and increase supervision over limit order handling by, among other things, enhancing training and education of specialists and traders, increasing review of display rates and exceptions, and conducting regular reviews of limit order display by supervised persons.
Automated Limit Order Display Systems
- Routing and display systems should automatically ensure display in situations where a specialist or market maker cannot otherwise attend to the order. Specialists or market makers that routinely display customer limit orders at the 30th second after receipt are not deemed to be in compliance with the Display Rule.
- Exchanges should design automated data systems that capture all relevant data needed for comprehensive and accurate surveillance of limit order display requirements.
- Surveillance programs should be as fully automated as possible and should produce exception reports that are neither overinclusive nor underinclusive. More fully automated surveillance produces exception reports capable of capturing most, if not all, relevant data pertaining to limit order display compliance. Surveillance programs that are not fully automated and, therefore, must rely on the sampling method of surveillance, should use adequate sample sizes, truly random samples, and should conduct full reviews of the specialist or trader under review.
- Surveillance programs should review for the immediate display of all eligible customer limit orders. Surveillance programs also should review for the immediate re-display of all eligible customer orders on the limit order book.
- Surveillance programs should review for specialists and market makers' over-reliance on automated display features.
- Surveillance programs should develop and implement comprehensive, written policies and procedures that clearly set forth the obligations and objectives of surveillance analysts.
- Surveillance programs should capture and monitor all instances in which specialists and market makers institute manual overrides of, or manually exempt customer limit orders from, automated display systems. Surveillance also should capture and more closely monitor those instances in which system overrides prevent the automated display and surveillance clocks from initiating their countdowns.
- Surveillance programs should capture instances where specialists or market makers route order flow to other market centers.
- Surveillance programs should review for the subsequent display of all limit orders that, upon initial receipt by a specialist or market maker, may have locked or crossed the market or, upon execution, may have violated the short sale rules, for compliance with limit order display rules.
- Surveillance programs should continue to perform surveillance on a consistent basis without unreasonable interruption. In cases of surveillance system problems or development, alternative surveillance should be conducted.
- Disciplinary programs should develop and implement consistent and adequate sanctioning guidelines for limit order display violations. Sanctions should provide a deterrent to violations.
- Disciplinary programs that rely on the sampling method of surveillance, since they are not reviewing all instances of potential violative conduct, should appropriately discipline each instance in which members are found to have violated display rules.
- Disciplinary programs should provide for adequate "lookback" periods for considering similar past violations when imposing sanctions, and institute procedures to properly identify, assess, and discipline patterns of recidivist violative conduct.