Direct Edge Expands Attributed Quote Program

Direct Edge filed a proposal with the Securities and Exchange Commission today, Tuesday, April 22, to introduce a standard "retail" attribution, which it expects to introduce to its market in early June─following a mandatory SEC period to allow for comments responding to the proposal─as part of the next software release of its trading platform.

Currently, most of the trading on Direct Edge's EDGX market is conducted on an anonymous basis, with 10 percent now attributed to specific firms placing orders. The new scheme will allow firms to designate orders as "retail" without having to reveal which firm is placing the order. For example, if a firm dominates trading in a particular stock, any trade could have a large market impact, so the firm may want to minimize the impact of any market movement on its trades by anonymizing its activity on certain occasions.

Initially, firms will be able to do this by picking the incoming port via which their order flow travels, to designate order flow as having full attribution, just designating it as retail, or no attribution. However, this would apply to the firm's entire order flow. As part of a later release this summer, Direct Edge will introduce the ability for firms to specify their designated attribution on an order-by-order basis, says Bryan Harkins, executive vice president and head of US markets at BATS Global Markets.

Direct Edge began offering trading with attribution in February 2013, as a means to attract market makers to retail flow on EDGX, which is the top US destination for retail limit orders, Harkins says. As a result of the initiative, 10 percent of orders on EDGX are now attributed, and─based on analysis conducted by the exchange in the first quarter of this year─attracts 18 percent more executions than unattributed orders, he adds.

"We are rolling out this program based on customer feedback... so we think firms like more flexibility and choice," Harkins says. "It's hard to argue with the statistics that fill rates are higher, but there are cases where a firm may not want to give up its full name."

In addition, firms that consent to full attribution split 25 percent of the revenues Direct Edge earns from selling its datafeed as part of a revenue-sharing incentive program, whereas firms that choose the standard retail designation will not receive any revenue share.

Whether the new designation will adversely impact fill rates has yet to be seen. "Is there a tradeoff between that 18 percent higher fill rate and lower fill rates if orders are not fully disclosed? We'll know more over the coming months as we roll this out," Harkins says.