Hi Eric P; Great thread! I thought I would post a cautionary note on ISLD and the arbitrage opportunities that sometimes arise from odd lots.
A few weeks ago, PGNS was trading around $14 per share. Someone placed a limit order on ISLD to sell 280 shares at $12.50 during after hours. The ISLD book for PGNS turned out to have no other entries. Placing this order turned out to be a very unwise thing to do when the next morning rolled around.
During market hours, such a limit order would not be accepted, as it would cross the market. But during after hours, it is legal, but stupid. My guess is that the seller thought that such a limit order would execute at the opening price, as if PGNS were a specialist traded stock, and that he therefore thought that his order was equivalent to a "sell at the open" order.
The next morning, before the open, the 280 shares were passed to the Nasdaq computers at the absurdly low price, but only 200 shares were shown. This is because the Nasdaq market works in multiples of 100 shares. A sharp eyed market maker saw the 200 shares, and bought them, no doubt selling out to the first market maker he saw. But since he didn't have an ISLD book, he didn't see the remaining 80 shares, which remained on the ISLD book, but, since it was less than 100 shares, was not passed on to the Nasdaq computer.
About an hour after the open, I noticed that PGNS was trading with a pretty good spread, and placed a limit order to buy 100 shares at $13.50. (Embarassingly, I didn't notice the odd lot crossing the market.) I was surprised to be immediately partial filled for 80 shares, at a price a buck below where I expected. When I figured out what had happened, I informed the "23" (I get these numbers confused, he's the guy in the office who punishes you for doing illegal things.) that I had a possible broken trade started.
I'm sure the seller was bummed when he found out that he had sold his 280 shares for a price a point below the lowest sale of the (trading) day...
If you buy something during the Nasdaq hours at a price that is far away from the market action (i.e. an unfair price), you can sometimes break the trade. The ISLD rules are that you have to call the error in within 30 minutes. So I had to wait out the 30 minutes. Sure enough, the counterparty was asleep at the wheel, and I made my easy arbitrage. (I didn't feel good about this, but what am I supposed to do?)
The moral of the story is: Don't put stupid limit orders on ISLD overnight, and remember that odd lots sometimes provide arbitrage opportunities on ISLD, due to their lack of visiblity to the Nasdaq.
(I could figure out what happpened in the pre-market part of the above story because the ISLD book shows time and sales of previous ISLD prints. It showed a purchase of 200 shares at $12.50 a quarter hour before market open, then my purchase of 80 more shares at the same price.)
Opportunities for erroneous arbitrage appear occasionally. I once saw a big market maker selling DELL $25 below the market in the middle of the day. As he got filled, he even raised his price 1/8th. It was obvious that he had programmed an incorrect number into his computer on override. After 30 seconds, he disappeared, and the stock continued to trade at its previous prices. Astute traders avoid taking "advantage" of these situations because the counterparty can cancel the trade. This leaves one in a risky and unprofitable position.
For instance, suppose you bought DELL on the cheap, as mentioned above. You then sold it for the $25 per share profit. But 15 minutes lader, the counterparty calls up the Nasdaq and cancels the trade. Sometime later, your office gets the call, and your trade is cancelled. Now you are short DELL. Depending on market action, you may be deep in the hole. Even if your inadvertant short is profitable, you couldn't have used the short key to sell the stock, consequently you must have made an illegal short, and any profits from the transaction will be taken from you. You can't win.
I believe the rules for breaking ISLD trades (during market hours) are that the trade is breakable if it happened more than $1 outside of the market, or 10% for stocks below $10 per share. These rules do not apply after market hours, though, so the guy who arbitraged the first 200 shares of PGNS mentioned above was clean. My purchase was on the margin between being breakable and being good, since it was about a point out of the market.
-- Carl |
