Direct Edge Trading Notice #12-43: Order Priority Issue

Please be advised that EDGX Exchange, Inc. (EDGX_®) has discovered a discrepancy between its order priority rule, EDGX Rule 11.8(a)(2), and existing functionality on the Exchange's System. This discrepancy has existed since EDGX officially launched as a national securities exchange in July 2010.

Rule 11.8(a)(2) assigns priority to Mid-Point Match (MPM) Orders over, among others, non-displayed limit orders. While EDGX generally does assign priority in that manner, we have identified a circumstance in which EDGX assigns priority to a non-displayed limit order on the same price level as a MPM Order based on time of arrival.  Specifically, if a non-displayed limit order is resting on the EDGX book at a particular price, and a MPM Order subsequently arrives at, or is adjusted to, that same price, EDGX assigns priority to the non-displayed limit order based on its earlier time of arrival at that price. A later arriving non-displayed limit order, in turn, would have lesser priority than the earlier arriving non-displayed limit order and MPM Order.  

Example

For example, assume the NBBO and EDGX BBO for XYZ stock is 10.00 x 10.04, there is a non-displayed limit order on the EDGX Book to buy at 10.02 with a timestamp of 10:05:00, a MPM Order to buy is entered and ranked at 10.02 with a timestamp of 10:10.00, and there are no other orders on the book at the NBBO mid-point. Assume further that a limit order to sell at 10.00 is entered on EDGX.  

Rule 11.8(a)(2) states that the MPM order would buy from the incoming sell order at 10.02, even though the non-displayed limit order arrived earlier than the MPM Order.  However, currently EDGX would execute the incoming sell order against the non-displayed limit order before the MPM Order.

Resolution

We are currently working on a change to the EDGX System to assign the priority of orders precisely as set forth in Rule 11.8(a)(2). To ensure that this change is properly coded and thoroughly tested, we anticipate this change will be effective by Tuesday, November 6, 2012.  In the meantime, EDGX will continue to assign priority as described in the example above until such change has been formally implemented.  

A separate Trading Notice will be issued when the System change has been fully implemented.  

More Information

Please contact the Direct Edge Sales Team at 866.472.5267 if you have any questions.  We sincerely regret any inconvenience that this discrepancy may have caused for you and your customers.