JB, it doesn't work like a que
>>Even then, two other market makers have bids in at 5 3/4 ahead of our market maker. Wouldn't those orders fill first? <<
One of the things that MMs can get away with on NASDAQ, that specialists can not do on an open pit exchange in the US, is fill his transactions ahead of the limit orders (at the same price - he can't jump past a bid or ask that is inside the price he fills at) {They have also been known to put their orders before a large market order (from their customer or the customer of someone they trade info with) with the idea that the large order will move the market. This is called frontloading and is illegal on other exchanges.}
>>I assume you mean that for the 2,000 shares I have a stop order on to show up under the ask column, our market maker would have to enter an ask of 5 3/4, below the previous low ask of 6. But since my 2,000 shares aren't in the ASK column, how would the market maker know they're there?<<
Unless your broker didn't want it (say in a fast falling market) your stop would never appear on the board as an ask.
If it does show up on the board (as an ask) - to purchase your shares the MM or other trader would bid.
I don't beleive that MMs can see the stops of other brokers clients. I don't know exactly how Datek works with its stops. I assume that when the stop price is reached the Datek server represents your stop to the market as an limit order (ask) or as a market order sell depending on how you specify the stop.
MMs can guess that a non-MM broker has a stop on their books and make a play for it - they just have less assurance that it will be there and that they will be the one to get it. Unless I am wrong about MMs not seeing the stops on other brokers books, this is what happened to you.
Brokers have been known to trade information about large orders for stocks they do not make a market in with brokers that do make a market. However, this did not happen to you as Datek Online/Island are all electronic. Yet another reason I like Datek and the Island!
With other brokers that do not use an ECN (the Island is an ECN) to clear, and who also make a market in the stock, they are privy to your stop info and can make the play I described. Since you are their customer, they then snap up your shares before it reaches the market.
If, instead of a limit stop, you have a market order stop for a large number of shares on a NASDAQ small-cap like BNGO you are really asking for trouble. If there is a gap between the bid that would trigger your stop and the next bid, they can snap up your shares below the stop price. Traders use market order stops safely (and for extra security in a fast moving market) on heavily traded markets like commodities or large-cap stocks - but doing so on a typical NASDAQ stock is asking to get burned.
L.L. & P. |
