I have received a number of emails about price improvements, how you get them, how it occurs, etc. I think I have gone into this a number of times but someone asked a question regarding NYSE trades/price improvements that I felt I would address since it clarifies the NYSE and the exchange.
The NYSE is a marketplace maintained by a specialist. Think of a person sitting a booth, with buyers and sellers standing around him, the "crowd". The specialist maintains the book on the stock, the best bids and offers and matches buyers to sellers. The book looks strikingly similar to the Nasdaq L2 screen, with bidders and offers represented.
Now the specialist matches buyers to sellers. LEts say a stock is bid 10, offered 10 1/4, 1000x2000 (called the size) Thats the best inside market. If you decide you want to sell stoc at 10, your 1000 shares, and you enter an order (assuming** your firm takes your order to the NYSE) to sell stock at 10, your stock will be matched and sold to the party bidding 10.
If you saw a piece of 20,000 bid for and you wanted to sell 15,000, in one stroke of the button you could sell the whole piece since there is a full bid for 20k, unlike the NASDAQ where mm are only bidding for lots of 1000 and can "run" from the bid if they smell a seller of a large piece of 15k.
Lets say you want to sell stock at 10 1/8. There is no party bidding at 10 1/8. You enter the order anyway at 10 1/8. The specialist is obligated to almost immediately (probably some lingo like reasonably), represent your order so the quote should become
10 x 10 1/8 (your offer). This shows the whole world someone (you) are offering stock at 10 1/8.
Now if someone with access to the NYSE and a firm that take you there, can buy your 1000. They see you are offering it, they can take your stock.
None of this explains how you might get a price improvement. To get a price improvement, you need a few things. First and foremost, you need your firm to NOT, NOT take you away from the NYSE. Why would a firm do that? Some firms dont route to the NYSE but rather nondiscriminatorily route to third market makers who pay order flow compensation or infact make markets or act as principal in the trade. If your firm is doing this, you will almost always get filled at the offer on a buy and on the bid for a sale.
But if your firm takes your market order to the NYSE, by the superdot, you have atleast a chance for an improvement.
Example....stock is 10 x 10 1/4, 3000 x 15000, last at an 1/8. if you went to a firm that routes to a third market, they love this kind of offer. Big offer, small bid, buy order. They will probably fillyou at 10 1/4, all you want. The odds are in their favor that they can bid at 1/8 and make the 1/8th spread or even better, buy it on the bid at 10.
A market order routed to the NYSE, not away could getyou the following:
1. You could get filled at 10 1/8 since someone was just selling at 1/8 (last)and may have more to go, standing in the crowd, not displaying the order since they dont want to weaken it, but will fill your order at the 1/8.
2. At 10..if a seller comes in and starts smacking the bids at 10, taking out the 3000 there, you might get filled at 10. Either you are going to get 10, or he's going to get 10, 10 1/8, or 10 1/4...but you will each get the same...many times the specialists will give the buyer, the passive buyer the advantage, rather than the aggressive seller and fill the piece at 10.
3. you can very likely get no improvement and be filled at 10 1/4. There maybe no more stock to sell at 10 1/8, no seller smacking bids. The stock lulls at the moment your order comes in, the specialist looks around, no sellers and simply fills the piece at the then current offer.
This might be classified as a passive price improvement, nothing that a trader of mine is working for, striving, just simply entering the order on the most liquid exchange. On the NASDAQ there are opps for more active price improvements, etc.
If anyone finds this useful, let me know and i will try to put something on nasdaq etc.
Also, check out our website, the Yamner Univ. section has some articles in the Yamner Library and in Soundbites on such things.
Regards
Steve@yamner.com
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