How does anyone trade OTC issues?

Discussion in 'Order Execution' started by maxpi, Mar 18, 2006.

  1. maxpi


    I had a limit order sit with my broker for several days, OTC issue, sell. The reported exchange data showed that the price had been above my limit on each of the previous 4 days. I emailed them to see why no transaction and got the following message:

    ==Dear Trader,

    This security, SALN, trades on the OTCBB where quotes are not firm. Quotes on the OTCBB are indications only and market makers are not held to those quotes or obligated to transact at the indicated prices.

    If you have any further questions, please feel free to contact us again. ==

    Wow, how does one trade these issues then? I had no problem getting into the position, trades fired off like crazy but I could not unwind it. I got out at breakeven eventually. I think the main problem was that I was trying to sell more than is sold in the typical day, this thing was too thin to get into in the first place. I can overcome that in the future but still, it looks like the MM's can do as they please to some extent.
  2. maxpi


    I guess that broker quote was squishy talk. I found the following on the OTCBB website:

    6541. Limit Order Protection

    Members shall be prohibited from "trading ahead" of customer limit orders that a member accepts in securities quoted on the OTCBB. Members handling customer limit orders, whether received from their own customers or from another member, are prohibited from trading at prices equal or superior to that of the customer limit order without executing the limit order. Members are under no obligation to accept limit orders from any customer.

    Members may avoid the obligation specified in paragraph (a) through the provision of price improvement. If a customer limit order is priced at or inside the current spread, however, the price improvement must be for a minimum of $0.01 or one-half (1/2) of the current inside spread.
    For purposes of this rule, the inside spread shall be defined as the difference between the best reasonably available bid and offer in the subject security.

    Notwithstanding subparagraph (a) of this rule, a member may negotiate specific terms and conditions applicable to the acceptance of limit orders only with respect to such orders that are:

    for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4); or

    for 10,000 shares or more, and greater than $20,000 in value.

    Contemporaneous trades
    A member that trades through a held limit order must execute such limit order contemporaneously, or as soon as practicable, but in no case later than five minutes after the member has traded at a price more favorable than the customer's price.


    This rule shall apply, regardless of whether the subject security is additionally quoted in a separate quotation medium.

    This rule shall apply from 9:30 a.m. to 4:00 p.m. Eastern Time.
    [Adopted by SR-NASD-00-22 eff. Feb. 8, 2001; amended by SR-NASD-01-39 eff. Aug. 1,2001; amended by SR-NASD-2001-78 eff. Nov. 1, 2001; amended by SR-NASD-2002-153 eff. Jan. 6, 2003.]

    Apparently, my order should have executed. I am not real sure about the verbiage "Members handling customer limit orders, whether received from their own customers or from another member" regarding the "from another member" part. If my order is placed through ARCA and Knight has a matching order that should mean my order has to get executed before the price can move higher. I should have become the overhead supply for a brief time regardless of the ECN. This is bugging me because these kinds of trades are fun, or will be if I can ever get this whole thing up and running well.

    I am pretty sure it was a technical problem between the broker and the ECN(s), I got into the trade with ease and after that I was on "ignore" for exiting, the entry was placed via the API and the exit order was placed manually via the brokerage software a day later. Obviously I need to have the means to contact the broker in realtime and get things sorted out at hand and I need to be alerted not when a trade is placed, but when the exchange quoted price moves above my limit so I can check executions.

    Does anybody have any clarifying thoughts on this?
  3. The rule you quote, if it applies, and if I understand it, prevents a dealer from trading thru your OTCBB order, if that dealer is holding your order. But if your OTCBB order is on ARCA, or with some other dealer, then the dealer can ignore your order, and trade thru it at will. I believe the trade thru rule does not apply to OTCBB. My info might be incorrect, because I don't think it is worthwhile for me to spend time understanding OTCBB, because it is way too unfair.
  4. maxpi


    Thanks. I believe you are correct. My autotrading software is not nimble enough for that situation. Back to the drawing board.
  5. azmi


    I trade OTC issues - and yes they have very low volume - specially the ones with a small float. If you have for eg. 10000 shares, my suggestion is that you throw out limits in small lot increments say 2500 shares each. The chances of it gettin hit are more likely than one big print of 10k going off.
  6. maxpi


    Thanks, I am pretty sure they are tradeable for what I am doing, little $500 trades basically. It looks like it would be beneficial to be able to cancel an order with one MM and get it to another one at times. My autotrading software as it stands right now could cancel an order if the exchange quoted price went above my limit order and replace the order via smart routing, that might do it, especially if I keep the size small.

    Eventually I am going to have to write my own broker interface. As it is I don't have access to bid/ask, or any routing but smart. If the spread is not too great, hitting the bid/ask with matching size seems like it would have to work.
  7. alanm


    No, it does not have to work. Quotes are not firm. You have no way of knowing where the real market is, where/when there are natural buyers/sellers, what their real limit prices are, or how to get to them. Your only hope would be issues that are liquid on ARCA, and there probably are not many of those, and no guarantee it will be liquid when you need it to be.

    Stay far, far away from the OTCBB.
  8. I have had very little actual experience trading the BB, but have watched them trade often.

    I do NOT see the problem described here. For the most part trades are filled at the posted prices , excepting fast moves where there are many orders ahead.

    You make it soubd like if Nite is offering 5000 at 50 cents, and you send an order, he will not fill you if he doesn't feel like it,

    Anyone have proof of this?
  9. alanm


    People write about it all the time, including the originator of this thread, who got traded through for days. Presumably, there were quotes present at some point, against which his orders were marketable if they were firm quotes, which they apparently weren't.

    I'd suggest looking at the T&S for the stock you trade, if you have to trade it. A $500 gross value trade sounds really small, even for the OTCBB. It's unlikely the human broker holding the order is going to go out of his way to get it done.

    None of this is how markets (of any kind - even grocery markets!) should work.