Nasdaq to further secure trade reference numbers

By Dow Jones Newswires
Posted Oct. 8, 2010 at 1:05 p.m.

Nasdaq OMX Group Inc., operator of the Nasdaq stock exchange, will strip information from stock orders that some traders say is too revealing.

Starting Dec. 6, Nasdaq will hide reference numbers assigned to orders meant to be invisible to the market, the exchange said Thursday in an alert to traders. Some traders were concerned that sophisticated computer programs could use those reference numbers to identify a larger pattern in orders and use that to manipulate prices.

While Nasdaq said the reference numbers could not be used by anyone to game the system, the exchange will replace them with zeros to ease lingering worries. Other exchange operators, including BATS Global Markets, tweaked their systems this year to randomize order numbers.

“Due to client demand, we ended up making the change,” said Brian Hyndman, Nasdaq’s senior vice president of transaction services.

Information linked to supposedly hidden orders became a flash point this year, after some investors voiced concerns that sophisticated traders armed with superfast computers could be using identification numbers to manipulate prices.

Hidden orders are often used by institutions hoping to execute a large order without disrupting the market. A trader placing a large order may break it up into smaller pieces, with only one order active at a time. For instance, someone hoping to sell 500 shares of a stock may sell 100 shares at a time, with each new order kicking in after the previous 100 shares have been sold. In such a reserve order, most of the trade is meant to be invisible. Nasdaq already used a unique number for each order to prevent linked orders from being detected.

Still, some worried that the information tags applied to these orders could be used by firms to help piece together which are part of a larger trade and use that information to drive up prices or otherwise manipulate the market. In late May, exchange operator BATS Global Markets modified the way it identified order information to allow customers to choose whether they would like their market order identification number randomized in the data that hits the tape after the trade is executed.

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