SOES Fundamentals:
The SOES (Small Order Execution System) system was designed to enable small investors access to instant executions of up to 1000 shares at the inside ask price (for a buy) or the inside bid price (if you were selling). I believe this system was established to rectify a problem identified during the 1987 market crash, when market makers simply did not answer their telephones and therefore could not be traded with.
In the early 1990's, daytraders realized that they could use the SOES system to quickly execute trades against market makers who were 'slow' to update their quotes in a fast moving market. These traders became very successful and were hated by the market makers. They became known as SOES Bandits.
As the 1990's progressed, the market makers used their influence to change Nasdaq rules, and therefore to give themselves even greater advantages over the individual investors and daytraders. Current rules give market makers the following two major advantages:
1) Market makers are able to quote sizes as small as 100 shares. In the past, market makers were required to post a minimum size of at least 1000 shares. However, with the new rules, most market makers will merely show 100 shares, regardless of their true size. Unfortunately, it is nearly impossible for a daytrader to cover their commission costs when trading sizes as small as 100 shares.
2) The 17 second rule. After each execution on SOES, market makers are given up to 17 seconds to update their quote. During this time, they can maintain their existing quote for 17 seconds, and subsequently pull their quote away without filling any additional orders at that price. Related posts:
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