Limit-NX feature on NYSE stocks kills volatility

Discussion in 'Order Execution' started by Ace_Rothstein, Apr 27, 2002.

  1. I trade listed stocks in New York for a daytrading company and wanted to know other people's opinions on this. Ever since the Limit-NX feature was introduced, it has tightened the ranges on a lot of stocks that I like to trade, making trading that much more difficult in this choppy environment. For reference I trade mostly stocks with daily volumes between 100,000 and 2 million shares, and use a lot of bullets and make much less than when the NX feature was not around.

    For example, when an index started tanking (before NX), 5000-8000+ share (big) market shorts would appear and the stocks would move 30-40cents or even upwards of a point before the market short would get taken out. Now days, once a big offer appears, it will step down 5-10 cents at a time and at almost EVERY interval some idiot will NX the offer and trigger a couple stops and start taking out the market short. Then it might step again BUT maybe it won't - there is no rhyme or reason. Before NX, the offer would NEVER get touched UNLESS THE SPECIALIST WAS READY TO TAKE THE WHOLE THING OUT! This made tape reading SO SO SO much easier because all you had to do was stop yourself on the uptick and 99% of the time, when the buyers were there to uptick the stock, the whole offer would be lifted at once. Now you're lucky if an offer steps down for 20-30 cents, whereas before NX they would come in for points.

    It seems that NX has taken control of the stock away from the specialist, which is really horrendous for tape readers. I was wondering if anyone had heard any grumblings like this from others, and whether the NX funtion has a limited lifetime??? I can't imagine the specialists like it either, and it doesn't really help us too much. Don? ANyone? I would love if they got rid of it once and for all...

  2. This is not necessarily a bad thing... I am starting to prefer slower, less volatile moves and if NX helps create such moves, I am all for it!
  3. Ace,
    You make a good argument for your point. I didn't trade listed stocks before nx, but I've heard that specialists definitely don't like it. But if they don't change the rule there may be a way to put it in your favour.

    I know of one of extremely succesful trader who effectively 'paints the tape' using nx. By making the prints go off where he wants them (usually a new low or high), he can sometimes get momentum going and keep it going just by nx'ing the bid or offer with 100 lots. Obviously, this must drive the specialist crazy if he is trying to work a larger order.

  4. InyOutty



    You're right on the money about NYSE market shorts these days. But I'm not so sure it's completely due to NX. Brokers and specialists have grown wise to daytraders using bullets, mainly because tons more people are now using them.

    Consider this, if you were an institution or specialist and knew people were short, wouldn't you use it to your advantage? If you're a specialist for example--and know traders will cover when they see an uptick--why not take the offer yourself if there's a buyer to lean against. Or if you are the institution offering, why not pull the offer altogether and get filled on the short-covering prints at a higher price?

    Cakewalk trading methods like the one you mention are fast becoming rookie-league. Traders who buy (sell) because they see a big bid (offer) aren't doing anything an 80-year old grandmother couldn't do with a PC and trading account. Over the long-run, market efficiently expunges easy money like this.

    On that note, here's a little prognostication. In 12-18 months I wouldn't be surprised if big bids and offers are few and far between on the NYSE, OR when they do appear, they'll be mostly fake (there to be hit or pulled). Instead, institutions will send smaller sized lots to lessen price impact, or use ECN reserve orders (Yes! ECNs will infiltrate listed territory as well).

    What it all boils down to is adaptation. Tape reading, chart analysis, arbitrage, and other techniques will take on a much greater importance. In that environment, NX (or any auto-ex route) will be your best friend.

    As for specialists not liking NX, you may be right in the short-run. But these are some extraordinarily resourceful individuals who WILL ADAPT NX TO THEIR ADVANTAGE. They already do now. Just look at the preponderance of 100 share bids and offers on the NYSE. Specialists use 1 lots to increasingly block NX trades. In many cases it's a disgrace in my opinion. 99% of the time there's no legitimate reason a specialist should be showing a 100 share bid or offer in a stock like IBM or CPQ when there is no imbalance. But that's life and now I'm getting off-track...

    Trade well my friend.
  5. The wonderful glorious market is a living thing and it adapts and changes with the environment. You want it to back up? If you cant outrun the tiger, say your prayers.
  6. Are you sure it's the NX feature?

    We are now recovering from a bear market. The markets in general used to have a lot of volatility for the past few years, many investors have been shaken out and are vowing to never touch the Stock Market again. This is a constant pattern that happens in the markets when you look back through history.

    we go up for a long time, sell off, go into a slump and than go up for awhile, sell off, go into a slump........go up for awhile, sell off go into a slump.

    Gee where are we now?
    There is a massive amount of decreased volatility in this market overall. Irrational behaviour that caused stocks to go move 50 points in a day are now gone.

  7. Guys,

    This NX execution route only holds for NYSE member brokers I believe... non-member brokers only offer their clients the slower superdot route... correct me if I am wrong...

  8. jem


    For what its worth I think you made a great point ace. And yes I felt like there were times when the specialist would say hey all you traders here is a freebee I need to take this stock down because I want to do business two points lower. So here is a big offer you hit the bids with me and we will all cover with those Janus guys--- when you give your bid at 50 1/8 ( I'll probably even fill you at 50 because you played the game correctly). Now you are right we (me too) get a little impatient and screw up the specialist's plans by nxing the offer so the specialist doesn't even put up those free signals anymore.

    However I am also sure rtharp is correct about the bear market problem too. How many people are talking about their big caps on the golf course and the Janus 20 or their index fund.
  9. Ahhh... those were the days... brings back sweet memories...
  10. Just to clarify guys, I started trading last February, and people were complaining about how crappy it was THEN, because even though market shorts would step down for 50 cents to a dollar, the other traders were used to several points of movement. So I was never around for the 20-30 point ranges on stocks.

    That said, every day I would come in, call up a few bullets, and wait for the market shorts to appear. And also I wasn't trading very crazy stocks - I actually traded mostly OSX (Oil Service) stocks (Noble Drilling, Smith International, Cooper Cameron), which I dont think were favorites of the general daytrading community (maybe I'm wrong here). Anyways I am adapting, but I really don't see how a market short being taken out with a 20-cent move of a stock is better than one stepping for a dollar and then ripping back when that ONE single short seller is gone. Either way, I am also learning to use NX to move stocks around, but ultimately I find that it is more difficult.

    Also I agree that the 100 by 100 quote to avoid NX-ing is just atrocious.

    #10     Apr 27, 2002