Redmond:
With the current SOES / SNET system, a market maker can display a 100 share quote at the inside bid or ask. After being 'hit' with an order at their price, they will have an additional 17 seconds in which to decide whether to refresh their quote at the same price, or back away to another price. If desired, they can simply keep refreshing their quote at the same price for the mere price of filling one little 100 share order every 17 seconds. Note that their market maker ID will always have a quoted bid or ask. The 17 seconds presumably gives them the necessary time to decide where to put their bid/ask after being hit with an order. However, in practice, this 17 seconds delay has been used quite to the advantage of the market makers to simply hold up the price of a stock. The same goes for the 100 share minimum quote size. By quoting a minimum of 100 shares, the market maker would have full descretion to fill any size order, but would only be required to fill 100 shares. Meanwhile, they can sit on the inside bid or ask and allow orders to 'pile up' with no obligation to fill the orders or immediately leave the inside bid or ask.
This changes with the new SuperSOES system. With the new system, if a market maker is displaying a 100 share order and is hit with a 100 share matching buy order, the market maker quote will immediately leave the inside ask. => His size has been exhausted at this price and so his quote immediately goes away. I believe the market will have a choice whether to auto-refresh a new quote several levels back, otherwise, the market maker offer will simply disappear and this market maker will have no quote listed on level II until he reestablishes a new quote. She/he will have up to 5 minutes to post a new offer once the old one is removed.
Note that this will also discourage market makers from posting 100 shares when they actually want to buy thousands. In order to stay at the inside bid or offer after being hit with a fill for their full quoted size, the market maker will need to have 'reserve size' behind their quote. Note that reserve size is only known by the system computer and cannot be seen by anyone in the market. However, a key point is that a market maker will not be able to use the reserve size feature unless they are posting a minimum size of 1000 shares. Therefore, market makers that are true buyer and sellers will be forced to quote 1000 shares with the new system, versus the 100 share limit currently in place.
I hope this clarifies thing a bit,
-Eric
P.S. I strongly recommend people listen to the slide show presentation on this new SuperSOES system. The link can be found on post #8000. |
