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Strategies & Market Trends : Trading Political & Regulatory Issues

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To: brec who wrote ()	12/12/1998 1:48:00 PM
From: brec	Read Replies (1) of 4

Knight Securities (Knight/Trimark Group, Inc.) is an active NASDAQ market maker (symbol NITE). On its Web pages there is a series of letters from Knight to the S.E.C. knight-sec.com In a letter of Jan. 29, 1997 from Walter Raquet, Exec. V.P. of Knight, to the S.E.C.'s Director of Market Regulations knight-sec.com Racquet provides an example of what he calls market manipulation by the Island ECN. I don't understand the market mechanics underlying the complaint. Hence my purpose in this post is to ask for clarification of what happened in the trade rather than to discuss the regulatory issues. Raquet says, "On 1/28/97 the following transaction occurred: Island's 100 Share Market Inside Market 13:51:00 64 79 1/4 71 71 1/2 13:51:26 Island narrows the 64 71 1/8 71 71 1/8 inside market by offering 71 1/4 for 100 shares 13:51:34 Etrade Customer buys 64 71 1/8 71 71 1/8 900 shares @ 71 1/4 from NITE 13:51:44 Island widens market 64 79 1/4 71 71 1/2 13:59:27 Island narrows the 71 3/8 79 1/4 71 1/8 71 1/2 inside market by bidding 71 3/8 for 100 shares 13:59:35 Etrade Customer sells 71 3/8 79 1/4 71 3/8 71 1/2 900 shares @ 71 3/8 to NITE 13:59:46 Island widens its market 64 79 1/4 71 71 1/2" (There is a discrepancy between the annotative text and the Island offer price in the second and third quote rows in the table. Let's assume that the text should read "71 1/8" rather than "71 1/4." [Or do I misunderstand the situation even more than I'm aware?]) My question is, how did Island's offer commit NITE to sell? I envision a NASDAQ Level II display like this, with NITE's size fabricated for illustration: Bid Size Offer Size NITE 71 20 NITE 71 1/2 20 Then comes the Island offer: NITE 71 20 ISLD 71 1/8 1 Now Knight's letter complains that it sold, presumably via automatic execution, 900 at 1/8 to an E*Trade buyer. I don't understand how the ISLD offer would cause NITE to sell at a price lower than NITE's posted offer. Likewise (although I've omitted the projected Level II display) I don't understand how the subsequent ISLD bid at 71 3/8 comitted or caused NITE to buy 900 at that price.

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