Games specialists play

For starters, I've been a long time defender of the specialist system. I still like it. I just don't like specialists. I like them less and less each day, and I'm more inclined to like the whole system less and less each day.

For the past 22 months, I have averaged 100+ transactions a day on the NYSE. I say this to make clear that I have had ample opportunity to observe the games the boys play (I'm certainly not bragging about it. It proves I'm a glutton for punishment). To call much of it fraud would not be exaggerating.

And let's pop the 'fair and orderly markets' bubble right now. LaBranche, by virtue of being the only publicly held specialist firm, has to disclose their numbers every quarter. And lo if their profit per dollar of principal traded hasn't moved to new highs last year, in the midst of one of the worst markets in a generation. Hmmm.

Here's a game. He's working an order to sell 100. He pieces together the buys. Before filling, he posts 100 on the bid. Some poor sap like me runs to cover or even go long for a quick scalp. We get filled at the offer (if he's being generous, otherwise, .05+ higher). Next thing you know, there's 100k print at the bid and poof...it drops a dime....

He's got the order matched. What does he have to lose by posting a bid there for 100. If you try to hit him, he can print his fill first and leave you in the dust with 'orders ahead.' Most likely, that large bid size will bring in a bunch of buying so that he can short against his big order (by selling to you) and cover when he prints it (by filling the order he had standing) -- or a dime lower when I dump my long at market...


Know a game? Feel free to contribute.

 

In futures this would be called front running and is not permitted. Yet specialists in the NYSE (and market makers in NASDAQ too?) can do this?

 

apparently. the rules are ambiguous enough that there is ample room to manuever.

The above scenario -- at least, my understanding of the events -- just happened to me on JCP and the block size was 16300. A study of the tape would be instructive.

Consider:
" The NYSE prohibits electronic entry and cancel of orders for a reason -- it allows a free "time" option. Electronic venues remove that free option and you can cancel if the market changes. "

This allows the specialist to decide if it's in his interest to fill your order. Sometimes he has to. But having a minute to play around, while you hit the cancel button, gives him a huge edge. It takes money from me every day.

Consider:

"Some traditional brokers report increasing use by specialists of a practice known as “freezing the book.” The specialist declares an “unstable market” and refuses electronically delivered orders (DOT) until the market resolves, usually with a minor price adjustment. Such conditions need not be published nor announced. These trading “hiccups” reportedly occur in major listed stocks six or seven times a day. The “freeze” effectively protects the crowd’s order queue as if the electronic order did not exist. "


Source at link. It's a draft of an article that appeared in Trader Magazine. (my thanks to Harold Bradley of American Century Investors for the information).

 

And front-running never happens?

 

So how often would you say it works if you just short when you see a big bid and go long when you see a big offer?

 

sometimes you can be right on and still lose money.

 

some people do that...but again, it's all in the fill. No scalp strategy will work if the fills aren't fair. There is way too much wiggle room both in the spread and in the way the hack has to deal with your order.

On days when order flow is light, they seem to play fast and loose with the markets. On days when there is real business to be done (nowadays, the occasional relief rally), I notice much less fooling around and faking out.

 

In the larger exchanges, if a trader acts as a floor broker he must be a floor broker the entire day. If he acts as a local, he cannot be a floor broker for that day.

In the smaller exchanges you cannot trade for yourself and act as a floor broker at the same time (although you can be both during the course of the day).

I would say front running is not a common practice in futures exchanges anymore. Although the crude oil and some metals pits are supposed to be very 'clubby' still.

 

just one more reason people like me are giving serious thought to the emini.

 

I also noticed that sometimes you go to hit a bid and you get offered there or you go to take an offer and you get bid there,all without the stock trading there.I wonder how often these are cases where the specialist is just posting a fake size to entice buying or selling to benefit his position.