I received a tremendous number of requests regarding the NYSE execution post, asking that I present something on NASDAQ executions. I put some comments below: Hopefully they have focus but I will state that trying to sum up what comprises a quality execution, especially on the NASDAQ is a tall order for someone who transferred in my first year from the Arts and Science school to the business school. And I never took to lawyerly writing, so hereinafter the parties to this thread, towit shall hopefully derive consideration for time spent reading this post. No express or implied warranties exist (thank g-d i gave up law! lol!)
Because the Nasdaq is a marketplace comprised of various market participants, many acting as principals in the transactions executed on behalf of clients, the quality of execution becomes even more important and stresses the quality of the executing trader/broker dealer.
Regardless of whether you simply choose to protect a customers order or strive for a price improvement, the primary consideration must be the clients best interest, that is doing whatever it takes to further the best interests of the client. This demands that a trader utilize any and all execution systems available, with the determining factor being the clients interests. I must say that I have several quality traders working on my desk, some more skilled that others, some more experienced that others, but ultimately a quality execution comes from the trader caring intuitively about the best interests of the order. We're not talking here about the skill or stock selection quality of the trader, but simply the traders ability to negotiate various execution systems, reading the market, the stock and your order.
Lets use the following example in our discussion. Customer A gives an order to buy 500 ABCD, a NASDAQ security.
I would group quality execution into a few categories:
a. Protecting a customer's order, market or limit;
b. Protecting a customer's order, while seeking price improvements;
a. The idea of protecting a customer's order demands that my traders engage whichever execution system will best execute a trade which has no reasonable means of achieving a price improvement. There are many scenarios and thus situations that could arise.
The stock could be exceptionally active, surging higher and thus we want to respond immediately.
If the stock is SOES eligible and the order is SOES eligible (see SOES/Execution systems in Yamner's Library at yamner.com), the SOES, Small Order Execution System, becomes a primary choice.
In the event the stock is superactive and the SOES cue is significant, thus minimizing the chance of an immediate execution, or if the quantity of shares is greater than SOES TIER limit, or if an ECN is the best offer/bid, we would go to alternative systems such as SNET preference or direct the order to a third market maker who will electronically, instantly match the inside bid/offer upto 2000 shares. Many would think that SOES is the best execution system but it has signficant disadvantages and limitations under certain situations (again, please see the docs on our website). Some of our systems provide greater liquidity and more immediate response time than most SOES orders.
The difference is that if I made the market in the stock, traded against it or acted as principal in the trade, there would be no motivation to execute the transaction with the stock moving swiftly in the clients direction. No market maker is decisively decide to sell stock out of inventory if the stock if moving higher quickly.
b. There are times when price improvements can be obtained, all the while the firm/trader should be engaging additional technologies, execution systems, to protect the clients order. Such improvements would be more likely in the following situations:
1. The stock is moving significantly in the clients direction
2. The stock is not moving but has a reasonable spread and there are participants will to effect transactions inbetween the bid/ask spread.
Examples make the point:
1. An example: Customer A gives an order to sell 1000 ABCD at $19. Fortunately for the client, the stock is acting well, printing nicely on the offer. A market order at most firms will get you a print at the bid, nonetheless, striving for a price improvement for a client, we would probably do the following:
SETUP the SOES terminal or routing terminal to sell the 1000 at the bid price and then begin offering stock on the offer. Sometimes the stock might move up so quickly that within a few split seconds the stock has edged up an 1/16 or 1/8.
As well, often a stock might have a reasonable spread where many parties would be interested in transacting business in between the bid/ask spread. Noone says you have to be executed at the bid/offer only. You see prints going on in between, why is that your particular order didn't go off at that price?
In this scenario, getting a price improvement here doesn't demand a graduate degree and a rocket scientist, just a trader that's not making the market in the stock and not acting as principal and is working the order in your best interest. Sometimes the price improvement can be significant, sometimes it is meager. Sometimes, the stock falls back and we end up hitting the bid, no price improvement realized. Nonetheless, if it can be had, and is had, the client gets it.
Now many will say, why don't I just offer it at the offer and if it moves higher, it cant move through me. Sure, no problem. You can demand your order is represented on the inside market, nonetheless, chances are slim you will get an improvement over that limit. As well, mm's face manning rules which gives them a pretty long period of time to work the order, trying to make a market in it, before they have to represent the order. They can then also represent the order by sending you to an ECN which is not SOES eligible and are often avoided for reputation by some mms. Often, I will represent client offers if the stock isnt strong enough to possibly move through the offer. Infact, I often try SNET broadcast at the offer price as I can sell stock without weakening stock, again depending on the particular order.
If a client had 4000 shares of some $7 stock and they were selling it with a limit and the stock moved higher than the limit, the mm firm might only give them their limit, (albeit immediately.), while there might be an improvement 'before you could blink an eye'. Sure they will take your stock at the limit. They consider that a quality execution. Yet if the stock is jumping higher and you could setup a system to protect the order at 7, all the while letting it move higher, trying for 7 1/8, 7 ¬, that is working an order.
No hard and fast rule applies to price improvements. It depends on the market, the stock, the order, the size of the order, etc. Utlimately though, without the right trader, it doesn't come. In the end, some are hard coming, they must be worked aggressively, consistently moving from execution system to another, whilst protecting the customers order, and yet some in seconds, without any effort at all. Those easy layups are the ones I think most clients are being disadvantaged with. Clearly very few firms in the country still work orders like our firm so most investors out there, don't have a firm working for them, but the easy improvements, the ones you put on snet and get executed in split seconds, or the ones where the stock is just flying up, there clients are being disadvantaged signficantly, in my opinion.
Remember, this is not some illegal tactic or something dasterdly, but something that these firms are legally entitled to do and fully disclose in your new account paperwork. Yet, in my opinion, it wreaks of a conflict of interest as they don't spend any time explaining this. Truthfully, few would want to discuss this and brokers would lose their jobs if their bosses caught them discussing this. Since it is our market niche and we are one of the few firms maintaining our market stance, we willfully try to teach the investment public.
Which store was it that coined the phrase."an educated customer is the best one'.
If you are interested in learning more about quality executions, please go to yamner.com Go to the Yamner Univ then to the Yamner Lib and browse the library for discussions on Price improvements, exchanges, etc.
As well, the quality of our firms executions is in addition to the access to our traders, feedback, guidance, experience and reputation.
Regards
Steve Goldman, Esq.
yamner.com |
