Dear Subscribers, Potential Subscribers and Friends of Direct Edge,
Our Enhanced Liquidity Provider program was pioneered three years ago because we saw an opportunity to provide better execution quality to investors and their brokers. While other exchanges were creating their own proprietary “dark pools”, we chose to provide a means to access such liquidity, which had historically been unavailable through exchanges, in a way that made sense for investors and these liquidity providers. While a small portion of our business, ELP functionality is an important choice for many of our customers, including certain customers handling retail order flow. To discreetly ban or eliminate ELP functionality without any other market structure changes would simply deny brokers and investors access to liquidity they previously enjoyed, with no realistic alternatives available to them.
Direct Edge customers continue to see how ELP usage can promote superior execution quality and lower transaction costs. One internal Direct Edge customer analysis showed over 10% of ELP-eligible orders achieving price or size improvement. A firm using ELP-eligible order types that execute 1 million shares per day against ELPs could save over $250,000 per year in transaction costs. Unlike some programs on other exchanges, orders resting on the book of our markets always have first priority and opportunity to interact with inbound order flow, prior to any ELP process being conducted. While ELP-eligible order types are not right for everyone, no one has offered any hard evidence that usage of such orders by a broker or investor is causing quantifiable harm to themselves, anyone else, or the system as a whole.
Every Direct Edge customer who uses the program chooses to do so, and any customer who wishes to be an ELP can do so. That choice levels the playing field, and we believe that brokers are best equipped to decide when participation is appropriate. We configure our order types so that our members have to “opt in” to use such functionality; and regularly remind our customers of defaults they have previously set for ELP usage and their chosen order exposure times. This ongoing interaction empowers our members to continually choose the right way to execute their order flow.
Because the ELP program was developed partially in response to underlying trends in market structure, it naturally can serve as a focal point for debate as to how regulation should evolve. We believe this debate should be constructed in a comprehensive, data-driven manner that does not undermine investor confidence in our current market, which is already providing excellent execution quality. In this vein, please click here for our Statement of Market Structure Principles which we believe will help re-focus the current dialogue in a positive and productive fashion.
William O'Brien
Chief Executive Officer
Direct Edge
E-mail: wobrien@directedge.com
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