Display Order Facility in US Equity Markets

Efficient price discovery is essential to the smooth functioning of the US Equities markets and affects every market participant.

Over the last several years, commentators and policy makers have focused on the amount of trading that takes place off national securities exchanges. Gary Gensler, the chairman of the SEC, recently pointed out that as much as half of the trading interest in the equity market can take place off exchange, in dark pools or internalized by wholesalers.

In June 2021, the LTSE (Long-Term Stock Exchange) sent a letter to the SEC proposing to create a Display Only Facility, or DOF. The proposed DOF would likely adhere to rules like those that the FINRA ADF (Alternative Display Facility) contemplated in the early 2000s. The theory being that once a DOF allows an Alternative Trading System (ATS) to publish a protected quote via the facility, those quotes would contribute to price discovery. Increasing displayed liquidity could help to tighten spreads and improve execution quality.

This Display Order Facility (DOF) can be thought of as being similar in process to a Trade Reporting Facility (TRF), but instead is used for sending quotes. An Alternative Trading System (ATS) reports its trades to the NYSE or NASDAQ TRF via FIX. Messages are sent for each trade they do, and contain the MPID of the routing ATS, symbol, price, and size. In the instance of the DOF, the ATS would send the same information, but for a quote.

The DOF quote would be immediately accessible and automatically executable in the same way that an exchange quote is. Participants would treat the ATS’s quote on the SIP (Securities Information Processor) the same way they do a NYSE quote. When a Smart Order Router (SOR) sees the quote, it would send an order using the MPID of the venue as its destination. There is no additional latency since the SOR sends its orders directly to the venue.

The value to the ATS is that if they publish the best quote, they will draw crossing flow to their venue that they might not otherwise have seen.

The value for a brokerage firm working client orders is that new DOF quotes may contribute to tightening spreads, which could result in better executions outcomes for their clients.