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Lessons from the Trenches
From our free weekly newsletter. (http://www.yamner.com/contact
Times & Sales w/ Quotes; Printing to the Tape; Quality Executions
I have often suggested the true measure of the quality of execution is
found in analyzing the execution report relative to the time the order
was entered or given to your broker/trader. On the NYSE or other listed
exchange, this is a fairly simple process. Pre-market orders are all
matched by a specialist such that all pre-open market buy and sell
orders are all printed and executed at the same price. On the NYSE a
specialist is responsible for maintaining an orderly market,
establishing a book where buyers and sellers place their bids and
therefore create a unified place where buys and sellers have standing.
The only caveat is that investors must enter their symbols with a .N
qualifier to filter out third and inferior markets. For example, enter
MU.N for the opening, high, low , etc. on Micron on the NYSE.
The Nasdaq is far more complicated. Unlike the NYSE, the Nasdaq is a
negotiated market with many market makers, each with their own bid and
offer. As well market makers each have a certain quantity of stock they
are bidding for or offering at these various levels. Pre-open market
buy and sell orders will span a more broad range as market makers do not
collaborate to establish a unified price at which these pre-open market
orders are filled.
As well, market makers have up to 90 seconds to print a trade to the
tape. Coupled with the fact that market makers have up to 17 seconds to
adjust their quotes after being hit with stock, it becomes even more
difficult to gauge the quality of a fill let alone the current action in
the stock. This further complicates who is actually offering stock, who
is bidding and who is in the midst of changing their quote as a result
of a trade done up to 18 seconds ago.
One analogy I have used in the past involves car dealerships. Imagine
the Nasdaq marketplace like a town with many car dealers each with the
ability to post their prices to an electronic bulletin board, the
consolidated quote, so that all other dealers and potential clients can
view their advertised prices. Each car dealer has its own price at which
it is willing to buy or sell a particular car. As the market for the
stock appreciates, the car dealer adjusts its price accordingly. Each
car dealer is supposed to act independently and thus the highest bidder
and lowest offer determine the market.
While one car dealer is willing to do a trade at a particular price,
another may not. At times, the dealerships may be competitive with
another, thus effecting trades 'done away' from the market maker
offering the cheapest car. For example, while car dealer A may offer the
automobile for sale at 10 1/8, another may have a higher price at 10
1/2. A customer might decide to go straight to dealer A and buy the
automobile at 10 1/8. Yet gauging the demand for the car at 10 1/8, the
customer may attempt to go to dealer B and ask dealer B to match, to be
competitive, with the dealer down the street. As we all know, while a
dealer might say he can't dare sell the car at that price, when push
comes to shove, many dealers will be competitive
The goal of a market maker is to be liquid in making their markets. They
simply hope to have multiple buyers buying at the offer and multiple
sellers selling at the offer and then they simply make the spread
between the bid at which they buy the cars and the offer, the price at
which they sell the car. Like any retailer, they need turnover.
The NYSE would be more like a town where there is simply one dealership
and with few exceptions, all buyers and sellers must place their orders
at this one location. This provides an easy, efficient means of buyers
and sellers coming together to make a market in the stock. A specialist
is given the responsibility of simply matching buyers to sellers and
simply charging a processing fee. With few exceptions, the specialist
does not take a position in the stock. Thus buyers are matched against
sellers. Each client is given fair representation in the market. There
is one place where one knows where they must go to buy the automobile.
When clients call and want to discuss the action in a stock, I suggest
that they take a look at a Times & Sales screen. This screen shows,
chronologically, the action in a stock, the prints and the corresponding
bids and offers in the issue. In evaluating fill relative to the prints
and the offer, one can see whether their trade was handled properly or
not.
Below is a times and sales screen for a listed stock, near the close
today. I annotated the screen to add some commentary.
/29 16:01:16 T 200 104 5/8 103.726 610171
01/29 16:01:14 B 104 1/8M A 104 1/2C S 2 X 2 CQ
01/29 16:00:15 B 104 1/4TRIM A 104 1/2C S 1 X 2
01/29 16:00:15 N 2027000 104 7/8
**This trade is the matched closing pieces where all market on
close buy and sell orders are matched, similar to matching of the
opening prices.
01/29 16:00:13 B 104 1/4TRIM A 104 1/2X S 1 X 1
01/29 16:00:12 M 1000 104 5s 103.726 608632
01/29 16:00:12 M 1000 104 5s 103.726 608631
01/29 16:00:12 M 200 104 5s 103.726 608630
01/29 16:00:07 B 104 1/4TRIM A 104 7sC S 1 X 1
01/29 16:00:06 B 104 1/4TRIM A 104 1/2X S 1 X 1
01/29 16:00:04 B 104 1/4TRIM A 104 11sTRIM S 1 X 1 CQ
01/29 15:59:59 N 200 104 3/8 103.726 608268
01/29 15:59:58 N 1000 104 3/8 103.726 608217
01/29 15:59:54 N 16000 104 5s 103.726 608075
01/29 15:59:51 N 2700 104 3/8 103.724 607867
01/29 15:59:46 N 4000 104 3/8 103.724 607703
01/29 15:59:35 B 104 5sN A 104 11sN S 10 X 65
**Notice the quote changing with the relative sizes in round lots
of 100 changing as well.
01/29 15:59:33 M 100 104 1/2 103.723 607141
01/29 15:59:25 B 104 1/2M A 104 11sN S 1 X 65
01/29 15:59:25 B 104 1/2M A 104 11sN S 1 X 65
01/29 15:59:23 N 6000 104 7s 103.723 606744
01/29 15:59:20 N 2000 104 7s 103.723 606557
01/29 15:59:15 B 104 1/2M A 104 11sN S 1 X 65
01/29 15:59:13 M 300 104 11s 103.723 606315
01/29 15:59:13 N 1000 104 1/2 103.723 606283
01/29 15:59:07 N 2700 104 5/8 103.723 606032
01/29 15:59:04 N 2800 104 5/8 103.722 605889
01/29 15:59:03 B 104 1/2M A 104 11sN S 1 X 65
01/29 15:59:02 P 100 104 1/2 103.722 605877
01/29 15:58:58 B 104 1/2N A 104 11sN S 200 X 65
01/29 15:58:53 N 1200 104 5/8 103.722 605490
01/29 15:58:50 N 200 104 5/8 103.722 605368
01/29 15:58:44 T 100 104 9s 103.722 605085
01/29 15:58:40 N 12000 104 5/8 103.722 604936
01/29 15:58:39 B 104 1/2N A 104 5/8TRIM S 200 X 1
I spend a fair amount of time discussing the first few paragraphs with
clients who are not familiar with how the Nasdaq differs from a listed
exchange. Most call when their quote systems' opening prices vary from
the fills they may receive on orders. For example, a client may give me
an order to buy 500 ABCD at the market, pre-open. At 9:30am, I buy
stock on the offer at 10 1/8, when the stock was quoted at 10 bid, 10
1/8 offered. (10 x 10 1/8).
Nonetheless, the market maker who sold me the stock has 90 seconds to
print the trade to the tape, to a times and sales screen, and in that
time period, or preceding my trade, a market maker may fill an entirely
different clients' market sell order at 10. My clients' quote service
may report the open as 10 because the seller at 10 may be the first
print to times and sales for the day.
Ultimately, when dealing with Nasdaq stocks, it is important to evaluate
the bid and offer relative to the prints and market action in
determining the quality of a fill. Unlike the NYSE which offers a
single, unified opening price for all buyers and sellers, the Nasdaq is
a negotiated market, with many market makers, each with their own
prices, each acting in their own interest. As a result, only a detailed
analysis of a times and sales screen will provide an answer as to the
quality of your fills.
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