Is ARCA 'smart'?

Discussion in 'Order Execution' started by Toonces, Jan 18, 2005.

  1. Toonces


    Do ARCA orders execute against market makers or other ECNs? I always thought that it did, but I often see ARCA locked with another ECN, usually INET. And they just sit there , unexecuted, with the bid and the ask the same price.

    I remember when the REDI ecn was still around, and there were two types of REDI orders, one that was proactive and would execute against anything, and another type that would only execute against other REDI orders. Is this what's going on with ARCA?
  2. qazmax


    ARCA does have smart routing. They do not have a direct link to all ECNs and such the orders may cross or lock for that reason.

    However, the major reason you see crossed markets with ARCA is because ARCA only routes away on the order entry. Their thinking is "Why should we allow the trade to occur away when we posted first? The other side should route to us."

    INET on the other hand always routes to the available market place even if posted after.

    There is the abilitty to instruct every ECN not to route away. ARCA calls this PnP or Post no Preference. By deault it is smart routed.

    INET posts by default and Smarts on instruction.

    Your broker will have a program that tags your order with a code which instructs the ECN on how to handle your order.

    Even if he ARCA algorithm would have your order routed away, if your broker told them to PnP, it would just sit on ARCA.

    One test you can do: (Must be fairly illiquid) Cancel the order and resubmit. If it executes right away it is likley that ARCA got locked by the other side. Because ARCA wil route away when the order arrives, but not after it is posted as mentioned above.

  3. jem


    excellent post, it should be routed to a top 10 list.
  4. danjos


  5. On some platforms you can designate an ARCA order as being limited to ACRA only. I believe additional execution fees are assessed if ARCA routes to another destination.
  6. qazmax


    An exchange or ECN always wants to match the buyer and seller on their system. They want as much volume as they can get to create more liquidity and become a better market place.

    e.g How things are quoted... sorry if this is too basic...

    If you send a buy order to ARCA say paying 50.00 for 100 shares of XYZ stock. ARCA will represent your bid on their exchange. If it is dissiminated you will see your bid on level 2 as "ARCA 50.00 1" or something like this. if you have the best bid in the world you will see it on level 1 (the inside quote or NBBO).

    When a seller comes to the market with a sell order of 100 shares of XYZ at 50.00 that seller may use whatever ECN/Exchange they choose.

    The seller may choose ARCA in which case the buy and sell will match up instantly and both buyer and seller will be filled.

    Or the seller may choose another market place, lets say INET.

    The 50 bid was first in the world on ARCA and the 50 offfer was second to arrive but that does not prevent both ECNs from just holding the orders in house. Meaning the market is locked at 50.00.

    So for these orders to execute one market place must route their order to the other market place. "Routing Away". Via their direct connection the send an electronic order to their competing market place.

    ARCA believes whomever posted first should get the liquidity. Hence they do not route after your order is posted. This is a fair policy for the whole world to follow.

    INET believes that if they are losing market share to ARCA that they better offer a better product and they route out for their customers even if it means another market place gets credit for INET's order flow.

    It meas that they have different policies. You will receive executions more efficiently on INET if all other factors are held constant (like liquidity for example).

    They are both very solid ECNs and I like the fuctionality of both of them. But, if I had to make a simplified router it would look like this...

    INET - for Nasdaq
    ARCA - for AMEX listed and OTCBB
    AMEX - for AMEX listed if there is an odd-lot or odd-lot attached
    NYSE - for 50% of NYSE listed
    ARCA - for 50% of NYSE listed
    NYSE - for NYSE odd-lots or odd-lot attached

  7. one small item to add to that is since ARCA is not a "SOESable " ECN like BRUT then you are NOT the NBBO and the first Super-Montage quote, whether it is BRUT or a market maker is the actual NBBO, Arca is their own SRO.

  8. I trade ETFs that are listed on the AMEX, but market makers on ARCA or INET often have a better bid or offer than the AMEX specialist. However, the size posted by MMs on ARCA/INET is less than the AMEX specialist.

    Let's say the current bids are:

    ARCA - 10K @ 80.20
    INET - 10K @ 80.18
    AMEX - 50K @ 80.10

    If I send a sell limit order to ARCA for 30K @ 80.10 what happens? Does ARCA fill 10K and send the rest of the order to AMEX? Does the MM on ARCA fill 10K, then has the option to put in a lower bid before the order goes to AMEX?

    Any info you can give would be appreciated.

  9. I've heard that some systems can and will convert the order to "preference" those other MPIDs.

    But what should happen is that you will get filled 10K @ 80.20 and your offer of the remaining shares should appear @ 80.10 crossing/locking the market.
  10. qazmax


    ARCA has a link to SuperMontage and can lift the market makers and ECNs on SM via this line.

    What you cannot do is use Nasdaq's SM to hit ARCA. Since this is limited to MM that register with SM.

    This is why I did not mention using Nasdaq Super Montage for anything. I do not believe the future market places reserve a spot for SM.

    You do not need to be on Super Montage to be the NBBO. Nasdaq is not the only market place to disseminate quotes.

    a 50.00 bid for 100 sh is posted on SM (lets say by some MM)
    a 50.00 bid for 100 sh is posted on ARCA

    If you route a sell order to 200 shares via ARCA...
    100 will trade on ARCA immediately and 100 will be sent to SM via the ARCA line to SM. This should execute immediately there and return a fill miliseconds later.

    #10     Jan 19, 2005