December 8, 2017
December 08, 2017
Mr. Brent J. Fields
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Comment Letter on Proposed Rule
[Release No. 34-81311 ; File No. SR-NASDAQ-2017-074]
RE: Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change to Adopt the Midpoint Extended Life Order
Dear Mr. Fields,
Nasdaq’s proposal to adopt the Midpoint Extended Life Order, a new Order Type rewarding market participants that commit to a minimum half-second period (“Holding Period”), seems to create more problems than it solves. The Midpoint Extended Life Order is a stopgap at best in improving liquidity in the market.
I agree with Nasdaq’s opinion that the market participants with longer investment time horizons should be given priority. Though these orders will be given priority the longer they are present and visible on the market, HFTs will still be able to take advantage of this order. An inexperienced investor will be more likely to keep their order up for more than half a second. Even with priority, they are still subject to execution price risk if there is no one on the other side of the trade.
Algorithms can exploit this order as well. If an algorithm can identify an incoming order in the book as a Midpoint Extended Life Order, it will be able to push in volume behind the midpoint order and create false liquidity- while allowing the submitter or the Midpoint Extended Life Ordre to most of the execution risk. Since the minimum size of the order must be one round lot, the algorithms will not have difficulty in discovering these orders as well. Though this order is voluntary, no one would use it because algorithms would use it to hide behind the best bid and ask.
If an algorithm simply holds an order in the market for half a second and obtains the midpoint price, it will be able to trade with others who have also input Midpoint Extended Life Order. This is akin to letting a wolf into a henhouse. Though it is complex to implement a unique waiting time for each security, having a blanket half second waiting period for every security is too broad for the behavior of thousands of equities. Though there will be more execution, it will be toxic liquidity- hurting the naturals in the market.