• Jul
  • 25
  • 2006
  • 10:52 AM

Q&A: Changes in sweeps, LRPs

By: Ray Pellecchia
File Under: NYSE

Faithful correspondent Tony Dey, owner of a day-trading firm, answers my Big Bored call for input, and writes:

Ray, I heard that the two LRP'S that the Hybrid has now will be merged into one. Can you please explain this. Also is the Hybrid getting rid of the Half-manual/Half-electronic model it was supposed to be based on? What about the Sweep features? is that changing too? I really hope it doesn't become like an ECN. Thanks. -- Tony Dey

Tony -- We are indeed modifying the sweeps and LRPs. We remain intent on offering customers both automated and manual choices for order execution, and have no intention of becoming an ECN.

We noted here the upcoming changes in sweeps and LRPs. Explanation, by way of excerpts:

Sweeps

The current design for the execution of a marketable order beyond the best bid or offer was to allow the order to automatically execute beyond that point and to “sweep” to a clean-up price. This automated “sweep” was designed to replicate the experience that block trades have on the trading floor with an execution at the inside and then a sweep up or down to the “clean-up price”.

Customers would also be provided the choice to send individual orders to price points that they may have seen on NYSE OpenBook®.

While customers applauded the concept of rewarding “liquidity providers” through the sweep design, many indicated they would not use the functionality, but would rather simply “walk the book” and trade at each price point. Rather than build a product that is not responsive to customer needs, the NYSE is redesigning the Hybrid Market sweep.

Instead of the clean-up price execution, marketable orders will execute at each price point in one continuous transaction until the order is completed or a liquidity replenishment point is reached.

With this change, customers will not have to send individual orders at each price point. Instead they will have the choice of sending individual orders or sending one order that is marketable beyond the best bid or offer. Sweeps will execute automatically at each price point taking into consideration all posted liquidity, reserve liquidity, Convert and Parity (CAP) liquidity, destabilizing immediate or cancel, and specialist liquidity at each price point.

Customers may execute their order at a better price than intended because of additional liquidity at each price point, which will be available to participate within this new design.

. . .

Liquidity Replenishment Points (LRPs)

The change to the sweep design noted above also allows for the simplification of the LRPs. As previously noted, there are currently two LRPs, the Sweep LRP and the Momentum LRP.

The NYSE will simplify the current design by merging the two LRPs into one more simplified approach. The concept will generally be the same in that the system will calculate an LRP based upon the last trade, and publish it.

At this time, the NYSE is finalizing the components of the new LRP and will describe them in more detail in a follow-up communication.

More to come soon on the new LRP.

Lastly, on the ECN question, you might be encouraged by the early results of the Lucent pilot, as described here in People still an integral component. Excerpt:

..So even in a penny-spread stock trading tens of millions of shares a day, there are times when sophisticated trading strategies or market situations merit a human "high touch."

This is a preliminary look, an early snapshot, subject to possible change as additional steps are implemented. But as an early indicator, it suggests that the Hybrid Market idea can work -- an affirmation that a blend of automated and human-interaction executions provides value to customers, even in a highly liquid stock.

Hope that answers your questions. Thanks for writing, Tony -- made my morning!


Comments

Ray- One more question my friend. What are D-Quotes? Thanks again.

by tony dey on July 25, 2006 1:59 PM

Tony -- d-Quotes are discretionary e-Quotes. (We've created quite an alphabet soup here, haven't we?) There's a good explanation in Week 25 of this Hybrid Training Program pdf.

Excerpt:

Discretionary e-Quotes extend the capability of e-Quotes by introducing additional features that electronically replicate aspects of the more sophisticated types of judgment that floor brokers exercise today on behalf of their customers.

The core elements introduced with Discretionary e-Quotes are pegging and pricing discretion.

. . .

Pegging allows floor brokers to automatically keep their interest in the quote even as the quote moves.

Floor brokers will be able to turn on a pegging feature and designate a price range specifying a ceiling or a floor price beyond which the discretionary interest will not move with the BBO. As long as the BBO remains within the specified range, the Discretionary e-Quote will be quoted in the NYSE BBO and eligible for automatic executions.

. . .

While pegging keeps interest in the quote, pricing discretion allows quoted interest to actively reach out and initiate trades with opposite-side interest at price points above or below the Discretionary e-Quote’s quoted price.

The quantity of an e-Quote designated to exercise pricing discretion is called a d-Quote. The entire e-Quote can be designated as a d-Quote.

d-Quotes may trade with any size contra-side interest, or the floor broker may set a minimum and a maximum size parameter dictating that the d-Quote will not trade with an order of that size quantity.

. . .

Thanks again for writing, Tony! How's business?

by Ray Pellecchia on July 25, 2006 3:17 PM

To make sure I understand this correctly:

Once a market order hits a LRP, does it convert to your typical auction type?

For example, if someone does a market sell of 50,000 shares on a stock that only trades 100,000 shares a day. It will automatically execute at each price level 5-9 cents down from the NBBO taking ECN top of book with it.

Then the specialist will open his spread as to attract liquidity providers or will it continue to autoexecute at each price level until it exhausts?

Thanks,
-Jon

by Jon on August 12, 2006 10:12 AM

Jon -- To take your questions one at a time:

Once a market order hits a LRP, does it convert to your typical auction type?
Yes.

For example, if someone does a market sell of 50,000 shares on a stock that only trades 100,000 shares a day. It will automatically execute at each price level 5-9 cents down from the NBBO taking ECN top of book with it.
The sweep function and the approach to LRPs have changed, as discussed here. Rather than the sweep resulting in a trade at the inside and a trade at the clean-up, in response to customer feedback we have modified the sweep to execute at each price point, including all liquidity at each level before moving to the next price point. To the extent that other markets have better prices, the NYSE will automatically route to those markets as long as the customer has not indicated on their order to do otherwise.

The new LRP will replace the two previously proposed LRPs and will be a set of values based a stock's price and volume. Those values will be updated and published by the NYSE periodically during the course of the day. It is possible to hit one of the LRP values, and when you do, all the LRP procedures apply. Details of the new LRP will be announced soon.

Then the specialist will open his spread as to attract liquidity providers or will it continue to autoexecute at each price level until it exhausts?
No, the system will provide a quote with one or both sides of the quote marked as an LRP and a "slow" quote with an E, F or U indicator. This indicator through the Consolidated Tape Association notifies users that an LRP has been hit and that the quote is no longer considered "firm". The specialist is required to either resume auto-quoting if the market is not locked or crossed, or conduct an auction and trade if it is locked or crossed.

In a situation where the market is not locked or crossed, if no action occurs within 5 seconds, then the system will resume auto-quoting. In a case where the market is locked or crossed, the system will not resume until a trade is clears the condition.

Hope that helps. Thanks for writing, and sorry for not responding faster. And thanks also to my Hybrid-Building Colleague and GTF (George Thorogood Fan) who helped with this answer.

by Ray Pellecchia on August 15, 2006 10:30 AM

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