Post by cyclops on Apr 17, 2011 13:24:12 GMT 10
The vetting of orders placed has often irritated clients both of a retail and institutional nature with incomprehensive and prolonged delays. Let’s drill down a little and find out why some orders are diverted to a human for review, you may be surprised by the reasons.
What is order vetting ?
Order vetting can be best described as a process whereby an order is intercepted and steered through a database of filters whereupon the order either succeeds or fails based on certain trading criteria. If the order passes it goes straight to market. If the order fails the filter review, it is then up to the operator to determine whether these orders can be released to the market or not. This can impede the speed in which order entry occurs as the order is appraised for its merits.
Your order breaches a filter : Ok how do brokers vet your straight through order (STP) ?
Typically your account will be allocated with a HIN which tells the broker what stock or how much money you hold.
If you try to sell more stock than you hold it will break a filter and will be denied. e.g. Placing an order to sell 1500 BHP shares when you only hold 1000 shares.
If you try to buy more stock than you hold in cash, the order will be diverted to a human and will be denied. e.g. Buy 1000 HVN shares at $3.60 which comes to $3600.00 plus commission but you only have $3500.00.
In some instances you may buy a large amount of stock and have the cash to buy it but find yourself being vetted (and delayed), why is that ? Well, some brokers may set a maximum $ order value ceiling on the ticket which diverts it to an operator for authorising. The reasoning behind this is that it may be a case of fat finger (incorrect data input (100,000 shares instead of 100 shares)) and the broker is protecting you by reviewing the order. There is some merit to this thinking and with some large orders it may be worth calling your broker and pre warning them of your intentions.
Untraded deletes is another filter that brokers use to stop traders from potentially manipulating activity in a stock. Simply put, it refers to the number of bids and offers that a user is allowed to delete from the market before an alert triggers. Once this limit has been reached you will need to seek permission from your broker before you can place a new order into the market. This may appear restrictive however to counter this, it is suggested the client amend their existing order/s as opposed to deleting and then re-entering them thus avoiding the untraded deletes quota.
Limit order if no market. If there is no market in your stock (i.e. no bid and offer/ no bid but an offer ; bid but no offer) and you wish to trade in that stock, the order will be diverted to an operator for vetting. The reasoning behind this is that since there is no price reference in that stock then caution must be taken to ensure a fair price is released to the market. This is to satisfy the ASX business rule of maintaining a fair and equitable market, thereby protecting the broker and the client against potentially paying too much if buying, or selling too low.
Concurrent bid/offer vetting. This occurs when you have exceeded a benchmark number of bids/offers in a particular stock and consequent orders are then filtered by an operator. In essence this is to prevent order stacking/layering of orders which can be viewed as manipulating the market for that stock. The reason is two-fold. By giving the impression there is more interest in that stock (due to greater depth), or enticing the rest of the market to bid above your orders (if stacking on the buy side) thus allowing you to sell your stock at a price higher than you otherwise could have without the laying of orders. You would then cancel your non-legitimate bids thereby completing the market manipulation exercise. The reverse is true if stacking on the sell side.
Ramping. This occurs when a comparatively small order in $ terms moves a particular stock by a certain % e.g. an order of $100 moves the stock up by 5%. These types of orders will be vetted by an operator who will determine whether any market breaches are taking place. This process also attempts to prevent “marking the close” whereby traders attempt to influence the closing price of a particular stock at comparatively little outlay to them in an effort to improve their portfolio valuations. This not only takes place on a retail level but typically happens at the end of the month or quarter when some unscrupulous fund managers wish for some of the stocks in their funds to reflect better closing prices for the preferred period.
The order Price Range Limit is probably the filter which is most often tripped unnecessarily. The main reason for this occurring is probably down to the broker not applying the appropriate range of filters on orders (and by that we mean the price) being placed during the open, pre-open and pre-cspa (closing single price auction).
Put simply, if an identical percentage and an identical price step filter using the last, bid/offer as a reference price is applied unilaterally on all price ranges (and hence all stocks) with the purpose of vetting all orders, you can be assured that a stock priced in cents (such as SDL.AX) should be vetted in a different manner to one which is priced in hundreds of dollars (RIO.AX).
How does this really work ? The price steps for a stock in quoted in cents should probably be in the range of 2 to 10 price steps, however in the instance of a stock being quoted in the $5 – $150 range anything from 20 to 250 price steps would be acceptable. Much the same logic applies to a percentile filter being applied to the last, bid/offer on a stock quoted in cents and a stock valued in (multiple) dollars.
The challenge for the broker is what filters to apply on what ranges and whether to include price steps or movements in % terms or a combination of both.
It should be noted that in the pre-open and pre-cspa (pre market) the price steps and the percentage filters are usually dramatically increased (doubled or tripled) by your broker to allow your orders to participate without unnecessary vetting (at least they should be).
This is because of the huge price overlaps that can be witnessed during pre-market opening phases. You may find, for instance, that to fill a BHP order on the open, you will need to bid way over what the auction price is to obtain priority in the queue e.g. BHP match price may be $38.80 however the highest bid prior to the market opening may be $46.00.
Unfortunately filters cannot always gauge what the correct parameters should be to compensate for these overlapping prices and hence the investor may find their order is directed to an operator for review prior to being released to the market.
Some brokers also use the Price Range Limit filter for another purpose, ensuring that orders are not placed too far from market. For instance if your intention is to join the bid / offer deep in the queue with little chance of trading that day but with the hope of the market going your way over time, it may actually trip a ‘too far away from market’ filter. This may be the result of a typo where for instance let’s assume you are placing an order to buy 100 RIO.AX shares at $106.50 but you accidentally type $10.65. This order should trigger an alert and your broker will probably reject the order or call you direct to alert you of the typo.
What is order vetting ?
Order vetting can be best described as a process whereby an order is intercepted and steered through a database of filters whereupon the order either succeeds or fails based on certain trading criteria. If the order passes it goes straight to market. If the order fails the filter review, it is then up to the operator to determine whether these orders can be released to the market or not. This can impede the speed in which order entry occurs as the order is appraised for its merits.
Your order breaches a filter : Ok how do brokers vet your straight through order (STP) ?
Typically your account will be allocated with a HIN which tells the broker what stock or how much money you hold.
If you try to sell more stock than you hold it will break a filter and will be denied. e.g. Placing an order to sell 1500 BHP shares when you only hold 1000 shares.
If you try to buy more stock than you hold in cash, the order will be diverted to a human and will be denied. e.g. Buy 1000 HVN shares at $3.60 which comes to $3600.00 plus commission but you only have $3500.00.
In some instances you may buy a large amount of stock and have the cash to buy it but find yourself being vetted (and delayed), why is that ? Well, some brokers may set a maximum $ order value ceiling on the ticket which diverts it to an operator for authorising. The reasoning behind this is that it may be a case of fat finger (incorrect data input (100,000 shares instead of 100 shares)) and the broker is protecting you by reviewing the order. There is some merit to this thinking and with some large orders it may be worth calling your broker and pre warning them of your intentions.
Untraded deletes is another filter that brokers use to stop traders from potentially manipulating activity in a stock. Simply put, it refers to the number of bids and offers that a user is allowed to delete from the market before an alert triggers. Once this limit has been reached you will need to seek permission from your broker before you can place a new order into the market. This may appear restrictive however to counter this, it is suggested the client amend their existing order/s as opposed to deleting and then re-entering them thus avoiding the untraded deletes quota.
Limit order if no market. If there is no market in your stock (i.e. no bid and offer/ no bid but an offer ; bid but no offer) and you wish to trade in that stock, the order will be diverted to an operator for vetting. The reasoning behind this is that since there is no price reference in that stock then caution must be taken to ensure a fair price is released to the market. This is to satisfy the ASX business rule of maintaining a fair and equitable market, thereby protecting the broker and the client against potentially paying too much if buying, or selling too low.
Concurrent bid/offer vetting. This occurs when you have exceeded a benchmark number of bids/offers in a particular stock and consequent orders are then filtered by an operator. In essence this is to prevent order stacking/layering of orders which can be viewed as manipulating the market for that stock. The reason is two-fold. By giving the impression there is more interest in that stock (due to greater depth), or enticing the rest of the market to bid above your orders (if stacking on the buy side) thus allowing you to sell your stock at a price higher than you otherwise could have without the laying of orders. You would then cancel your non-legitimate bids thereby completing the market manipulation exercise. The reverse is true if stacking on the sell side.
Ramping. This occurs when a comparatively small order in $ terms moves a particular stock by a certain % e.g. an order of $100 moves the stock up by 5%. These types of orders will be vetted by an operator who will determine whether any market breaches are taking place. This process also attempts to prevent “marking the close” whereby traders attempt to influence the closing price of a particular stock at comparatively little outlay to them in an effort to improve their portfolio valuations. This not only takes place on a retail level but typically happens at the end of the month or quarter when some unscrupulous fund managers wish for some of the stocks in their funds to reflect better closing prices for the preferred period.
The order Price Range Limit is probably the filter which is most often tripped unnecessarily. The main reason for this occurring is probably down to the broker not applying the appropriate range of filters on orders (and by that we mean the price) being placed during the open, pre-open and pre-cspa (closing single price auction).
Put simply, if an identical percentage and an identical price step filter using the last, bid/offer as a reference price is applied unilaterally on all price ranges (and hence all stocks) with the purpose of vetting all orders, you can be assured that a stock priced in cents (such as SDL.AX) should be vetted in a different manner to one which is priced in hundreds of dollars (RIO.AX).
How does this really work ? The price steps for a stock in quoted in cents should probably be in the range of 2 to 10 price steps, however in the instance of a stock being quoted in the $5 – $150 range anything from 20 to 250 price steps would be acceptable. Much the same logic applies to a percentile filter being applied to the last, bid/offer on a stock quoted in cents and a stock valued in (multiple) dollars.
The challenge for the broker is what filters to apply on what ranges and whether to include price steps or movements in % terms or a combination of both.
It should be noted that in the pre-open and pre-cspa (pre market) the price steps and the percentage filters are usually dramatically increased (doubled or tripled) by your broker to allow your orders to participate without unnecessary vetting (at least they should be).
This is because of the huge price overlaps that can be witnessed during pre-market opening phases. You may find, for instance, that to fill a BHP order on the open, you will need to bid way over what the auction price is to obtain priority in the queue e.g. BHP match price may be $38.80 however the highest bid prior to the market opening may be $46.00.
Unfortunately filters cannot always gauge what the correct parameters should be to compensate for these overlapping prices and hence the investor may find their order is directed to an operator for review prior to being released to the market.
Some brokers also use the Price Range Limit filter for another purpose, ensuring that orders are not placed too far from market. For instance if your intention is to join the bid / offer deep in the queue with little chance of trading that day but with the hope of the market going your way over time, it may actually trip a ‘too far away from market’ filter. This may be the result of a typo where for instance let’s assume you are placing an order to buy 100 RIO.AX shares at $106.50 but you accidentally type $10.65. This order should trigger an alert and your broker will probably reject the order or call you direct to alert you of the typo.
