SOES : (Small Order Execution System)
(Electronic Communication System)
During the crash of 1987, there was a lack of liquidity in the NASDAQ
market. The reason for this lack of liquidity was because market makers
refused to answer their phones and execute the trades as the market was
going down. Since the market makers had no buyers for the stocks it
meant that they have to buy the stocks themselves This system was
implemented right after the crash of October 1987 and SOES became
mandatory by the SEC.
The SOES system only allows you to buy or sell from the inside market
(best bid or ask). The orders can only be entered in maximum sizes of
200, 500, 1000, depending on the stock, this is called the "TIER" size.
Even though a Market Makers is displaying his required TIER size, he may
have more to sell or buy (most of the time they do) and this is one of the
toughest part in day trading, knowing IF a Market Maker is a buyer or
seller or just displaying his SOES requirements.
SOES orders cannot be "AON" (all or none). It is always a PART order.
Also, it is good to know that market orders generally takes preference over
limit orders.The SOES system can not hit an 'ECN' (Electronic
Communication System) like 'TNTO' , 'INCA' , 'ISLD' ,'ATTN' , 'BTRD' and
'REDI'.
When you are going to press the buy or sell button you don't have to
specify the Market Maker, the SOES system will trade to the next Market
Maker in line to get fill, your order is placed in line behind other order
queues, the order in which your trade reaches a Market Maker is how it is
executed, therefore you will get partial orders because many people want
the same stock that you want, so you have to be fast and don't hesitate,
be decisive.
There is a 5 minutes time limit for executions, this means that you have to
buy and wait 5 minutes to buy again. But you can sell right after you
bought the stock. The time limit applies to both sides of the trade. If you
violate this rule, the software will cancel your order.
Sometimes a Market Maker has an advantage and they stay on the best
bid or ask and not buy or sell to you. They have 15 seconds to refresh his
price before he decides to move to a new price, he is watching LEVEL III to
judge how many buyers are building up. This allows him to decide what he
is going to do without actually doing it.
Keep in mind that if the "Queue" is filled, you will get in trouble, if the price
upticks, the order will get canceled (limit orders). BUT the advantage of the
SOES system is that it is the fastest and the market SOES the fastest
possible. With the SOES system you are trading price improvements
speed IF all the conditions are in place.
ARCA : (Archipelago)
ARCA is kind of a smart execution system , this means that it looks
around searching for the best possible order execution. A trader using
ARCA can place orders on the LEVEL II screen and may join the bid and
ask whenever they want.
ARCA unlike other execution systems, has some built in functions that
make it a "smart" execution system, joining the bid or ask is straight
forward, just enter the price of the bid when you are buying or the ask when
you are selling and you will see yourself on the LEVEL II as both 'TNTO'
and 'ARCHIP' this allows you to play Market Maker , i.e. You are a Market
Maker with the exception of the fact that you as an 'ECN' are NOT
SOESable , you can only be hit by someone who preference you when you
are on the bid or ask and acting as a Market Maker.
You cannot control the size of your fills, therefore, you cannot do 'AON' (all
or none) with ARCA , this is the basics of this execution system.
The functions change when you attempt to buy or sell to the bid or ask,
when selling to the bid, as an example ARCA will automatically go to a
Market Maker on the bid, ARCA uses SELECNET to hit the bid, ARCA
can not, nor will use SOES, when selling to the bid ARCA allows a Market
Maker up to 30 seconds to take what we are offering (Selecnet
Preference), If not deal is made it moves to the next most active Market
Maker and so on until the entire order is filled, while this is happening
ARCA will display ARCHIP on the offer , this is a sign to others on the
"book" that they can buy immediately from you.
If the bid price goes below your limit price, ARCA will automatically display
TNTO on the offer, you are now offering out stock on the offer and ARCA
will remain 'live' at this price until the entire order is completed , by offering
out we have no way of controlling our fills, we are offering stock and a
buyer can take whatever they want.
The advantage of ARCA is that it works very hard for you on multiple
systems, the bad part is that it is slower than you working each system
individually.
As far as partials orders are concerned, ARCA will allow unlimited partials
at one ticket price for your order up to 2000 shares.
Remember that 'TNTO' is what the whole world is seeing (those systems
not using ARCA will see TNTO on their LEVEL II screen) and 'ARCHIP' is
just you individually, 'TNTO' is the cumulative of all the ARCAS , the
'ARCHIP' is the internal book of MBTRADING (http://www.MBtrading.com)
SELECNET
This is also an electronic system of trading primarily used for trades
between Market Makers. It offers the trader added flexibility when
executing an order on the NASDAQ Exchange.
SELECNET is a Market Maker to Market Maker execution system,
therefore it is important to note that your bids and offers (like SOES) are
NOT reflected on the LEVEL II screen, instead, orders are displayed on
Market Makers terminals only.
SELECNET is a negotiable system, meaning that a Market Maker may or
may not execute your order unless it is at his advertised price and he
actually sees it appear on his screen.
The structure of SELECNET is such that traders will bid or offer stocks to a
Market Maker, this price that one bids or offers is not limited to just the bid
or ask (inside market) but instead a bid for example may be at the current
bid or the current offer, you can not go below the best inside market like
ARCA.
Once the order is "live" and NON-preference, all Market Makers will see
this order on their trading stations, this is known as a Broadcast, the
Market Maker will then execute the order, in many cases, manually to
complete the transaction with the trader.
Orders can also be placed on Preference, by doing this , a trader can
isolate one Market Maker to trade with, especially IF this Market Maker is
very active in the stock you want to buy or sell, the benefit of this is that
you get his immediate attention which often results in a faster execution.
Size restrictions on SOES are not present when using SELECNET , this
allows a trader to take or liquidate larger positions without being subjected
to SOES 'TIER' limits or the SOES 5 minutes rule.
Some traders I know use SOES to get in fast and they get out with a
better price using SELECNET, remember that IF you want out…. YOU
WANT OUT and you have to use the appropriate system to do that, you
have to decide this in few seconds.
SELECNET allows price improvements ; market makers can allow your
order to expire; can execute any number of shares up to 10,000; allows
preferencing of a Market Maker, allows for an 'AON' , does not obligate the
Market Maker at any price but the one showing ; Broadcast to all Market
Makers ; can be used pre and post market ; does not display on LEVEL II
screen.
ISLD (ISLAND)
(Electronic Communication Network)
ISLD lets any participant trade with any other participant on equal ground.
It is very active, the orders in ISLD are posted to the ISLAND BOOK
(Electronic book) which list ALL the buys and sell orders for a particular
stock that come in through ISLD routing system. Any buy or sell orders
posted to the ISLD book AT THE SAME price are crossed or executed
immediately, you are trading with someone that has just posted an
opposing order on the ISLD book at the same price as yours, if your order
can not be matched within the ISLD book , it sits on the ISLD book until an
offsetting order comes in to match against your order or until you cancel
the order.
Market Makers can execute against the ISLD book orders by preferencing
ISLD through SELECNET.
While your order is awaiting execution on ISLD it will be displayed on
LEVEL II screen if it is the best bid/ask currently posted on the ISLD book
, you can not see all the pending orders on the ISLD book, just the best
bid or ask.
You can place only limit orders on ISLD, not market orders. Also, no 'AON'
(all or nothing) are allowed. Therefore you will get partials fills on ISLD, to
avoid this you must watch the size of the ISLD bid or ask on LEVEL II to
make sure the size of the ISLD best bid or ask is big enough to fill the
order, the rest of the order will remain "live" until an offsetting order is
posted again on the ISLD book to match your remaining shares.
Remember that you are ONLY trading against other ISLD traders. No
Market Makers are on the other side.
A difference between ISLD and INCA is that ISLD orders are automatically
mirrored on NASDAQ's SELECNET system giving them exposure to every
NASDAQ workstation in the world. INCA (Instinet) orders are only exposed
to those who have Instinet terminals.
ECN's names :
TERRANOVA TRADING LLC 'TNTO'
ISLAND 'ISLD'
INSTINET 'INCA'
BLOOMBERG TRADE BOOK 'BTRD'
ALL-TECH INVESTMENT GROUP 'ATTN'
SPEAR LEEDS AND KELLOGG 'REDI'
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