Perpetual NYSE Specialist Abuse

Discussion in 'Professional Trading' started by hayman, Aug 20, 2003.

  1. hayman


    Although I'm a little fish in a very large pond, I am on a crusade to rid the market of these improprieties, and expose as much as
    I am capable of. As such, here is a concise description of
    problems that currently exist on the NYSE (all relating to
    Specialist activity), which prompted me to write to the SEC,
    NASD, and NYSE market surveillance division. Of course, I received boilerplate letters/emails back from the latter 2, and never heard from the SEC. Feel free to use any of this information in future articles, to depict how the "little guy" is getting hurt from these corrupt practices. By the way, I am a profitable scalp trader; however, I feel that my profits are being limited by the abuses below:

    Since I began my full-time job of Day Trading a year ago, I have
    learned an awful lot about how the market works, and unfortunately, have learned how corrupt the marketplace really is. I worked for Reuters for 13 years in IT management (the majority of which was spent developing institutional and retail foreign exchange-based trading systems), and thought I knew everything about the marketplace, until I actually started trading for a living. I trade exclusively NYSE-listed issues that have low liquidity (average of about 100K - 200K shares per day). My chief 3 complaints with NYSE, are as follows:

    1) Specialists "pennying" front-running activity seems to be on the rise, since market liquidity has dried up of late. Although NYSE Open Book quotes are on a 10-second delay, market orders that are "front-run" by Specialists (by a penny), rarely, if ever, appear as entered orders on the NYSE Open Book. This results in Specialists "jumping in front" when it is advantageous for them, and diminishes the usefulness of the supply/demand information provided in the Open Book, and provides the Specialist with a tremendous advantage. This activity is running rampant these days - the invent of decimalization has been a real boon
    for the Specialist; not the trader. The so-called "price improvement" that NYSE allows for, provides for penny improvements for those who are already willing to pay the "market" price for a stock, and causes "price disimprovement" for those that are posting limit orders, and are jumped in front of. This clearly disrupts the laws of supply and demand in the marketplace, and diminishes the usefulness of placing
    limit orders. This results in diminished confidence in the marketplace by those placing limit orders, which will inevitably result in fewer limit order being placed. This will ultimately (and has already) diminished the liquidity in the marketplace.

    2) Orders that get routed to 3rd party markets or ECN's and
    that are at the top of the book, for a NYSE-listed stock, invariably get passed up on execution, when a NYSE-based order can be executed at the same price. The Specialist invariably gives precedence to NYSE orders at the SAME price (which are either
    shares of the stock in HIS portfolio OR are customer NYSE market orders), even if these 3rd party orders are at the top of the book. This poor inter-market coordination (governed by the truly archaic ITS system) is within legal boundaries, but creates 3 inherent problems:

    a) Poor execution for these types of 3rd party market top-of-
    book orders, which diminishes the fairness of the marketplace. There truly isn't one market for these stocks, but many, as a result, which creates inefficiencies, and leads to advantages for Specialists;

    b) Creates a logjam for limit orders, that are stuck behind these types of orders. As a result, I will be less likely to place a limit order behind one of these 3rd party market orders, if they are at the top of the book. This results in the altering of the supply/demand and liquidity for this stock. Limit orders are the backbone of what creates a market for a given issue, and tampering with this activity, is a true violation of what the marketplace is all about;

    c) Although it cannot be proven, the Specialist can place a trade at the top of the books for one of these ECN's, and basically render all limit orders behind it, useless, by continuously making fills at that price. The Specialist, by rules of the ITS market, can give precedence to orders on the NYSE (his/her own or customer-based) at that price, and effectively ignore any of these ECN orders (by rule, he/she does not have to fill "across" these markets). What winds up happening, is that regardless of whether the Specialist has created this top-of-book ECN trade or not, this archaic ITS system effects the laws of supply and demand, which is not a good thing for the fairness of the marketplace, and certainly helps diminish public confidence in the marketplace.

    3) Although it is very hard to prove, there are some Specialists that create bogus orders at times (on the NYSE Open Book), that are placed on the book, which help manipulate the marketplace in their favor. There is no question that this activity occurs, and the legality of it is certainly questionable. Unfortunately, this is very hard to prove.

    I have written to the NYSE and the NASD to complain about these activities (with concrete Time and Sales examples), for what it's worth. Additionally, I am scouring the Internet in an attempt to see what legislation is in the pipeline to correct these problems, and to find out if there is more that I can do to help expose it. The average John Q. Public person has no idea that these activities are occurring - it is traders, like ourselves, who are intimate with these unethical activities. Furthermore, these improprieties are readily more apparent to the trader in stocks that have thin liquidity. In high liquidity stocks, it is very
    hard to recognize these activities, since the market moves so quickly with these issues. In thin liquidity stocks, every move can be watched and tracked, and it is that much more apparent. Moreover, these practices seems to be on the rise, since the market's overall liquidity has dropped dramatically over the last several months.

    I love trading for a living, but having to deal with these severe imperfections in the NYSE, is an impediment I shouldn't have to face. Specialists are in business to make money first, and to help regulate/stabilize the market second. These 2 functions are not compatible, and until they are addressed properly, this "all-boys club" will continue to undermine the spirit of the true marketplace.
  2. I trade exclusively NYSE-listed issues that have low liquidity (average of about 100K - 200K shares per day). My chief 3 complaints with NYSE, are as follows.

    1) Specialists "pennying" front-running activity seems to be on the rise, since market liquidity has dried up of late.

    how do you know its the specialist pennying you? it might be me. if i see a big spread on a nyse stock i look for ways to get in between the spread.what seems to you to be specialist out to screw you might be just other traders trying take advantage of the rules.
    you seem to lack knowledge of how order routing and ecns work. you might want to study up on it.
    low volume stocks are always going to be tough to get fills on.
  3. hayman



    I think you missed my point. I'm not talking about traders/Specialists jumping in front of me on the limit books - that happens all the time, and is part of the trading game.

    What I'm talking about is a market order that comes in, and a penny price improvement (aka, price disimprovement) takes place in front of me on that order, when I had the inside bid/ask. That is surely not YOU jumping in front of me, that is the Specialist (unless, of course, your counter limit/market order arrived at the same time).

    Further, I know a Specialist very well, and although he shall remain nameless, admits to all these allegations, off the record. Specialists are slick poker players, who have a major advantage over us traders, and use it to the fullest extent.

    Contrary to your statement, I understand the rules of the road much too well. I deal with it, but am a major advocate and spokesperson for NYSE reform.
  4. jem


    amen hayman
  5. 2) Orders that get routed to 3rd party markets or ECN's and
    that are at the top of the book, for a NYSE-listed stock, invariably get passed up on execution, when a NYSE-based order can be executed at the same price.

    i was mostly referring to this when i said a lack of knowledge of how order routing and ecns work. the specialist has no obligation to fill these at any price.
    i agree with you on some of the other things.
  6. that's why i stopped trading those light volume NYSE stocks.

    i was ready to go down there and beat the crap out of the little wop who was pennying me...
  7. hayman



    That is my point exactly ! The Specialist has no obligation to fill any orders posted on ECN's. Hence, by having an inside limit order posted on an ECN, he/she has effectively pinned the price, if he/she elects. To me, this is direct tampering of the natural laws of supply/demand. The fact that ITS and its archaic rules exist, and the fact that NYSE listed stocks effectively trade in several, non-correlated market places, adds to the frustration.

    It's amazing it's 2003, and we are still dealing with these antiquated rules, which can easily be exploited by Specialist firms.

    Inexcusable, in this day and age.

    By the way, venting like this beats the heck out of doing hard drugs.......:)
  8. Dustin


    Explain how the specialist is "pinning" the price, and how that would be beneficial to him/her.
  9. hayman


    As just one example, if a Specialist wants to unload his holdings on a stock, and wants to ensure that the current limit book on the ASK side doesn't take precedence over a price that he feels is appropriate, he can "pin" the ask by entering a "large" sell order via an ECN, that becomes the best price, and that will not get reasonably filled in the short-term, due to its large size. Any market buy orders that come on the NYSE can then be filled by the Specialist at that "best ECN" price from the Specialist's holdings, since he is under no obligation to fill the ECN best-price order. In the event that the ECN position is filled as well, his mission is equally accomplished. Hence, many market orders to buy can come in, and even though under normal laws of supply/demand, the price would move up (and these limit orders could be filled), the Specialist is pinning the price, so he can unload his stash ahead of these higher-priced limit orders. By the time his stash is unloaded, the market may be moving away from this current ASK price, and those traders who have sell limit orders may be fat out of luck on getting filled.

    My friend, the Specialist, taught me that one. It is used widespread across all Specialist firms, and is within NYSE "legal" boundaries. The inequities of NYSE stocks serving multiple markets and the crude rules of ITS, allow for this to happen.

    Reform, reform, reform !!!!!
  10. I get price improvement on my limit orders from 10 to 20 cents on thin issues I trade every day.

    I've never been pennied on a market order, although it happens on limit orders all the time. Thats probably just Vehn.

    I don't like the ECN's in my thin listed stocks period. The more the ECN's trade in listed, the more listed becomes like Nasdaq.

    Why should the specialist include the ECN in it's market making when Island doesn't include any other ECN.

    The point of an ECN is to provide an alternative marketplace to trade a stock. I didn't know that the role of the specialist was to link all the marketplaces together and ensure a fair market between them.

    I like a specialist system, and I don't want anything to change the current system because I may lose my edge.

    Just interested whether u guys are trading the same thin stocks i do?

    I' trade every NYSE stock between 50 and 120 with avg vol < 3 mil and > 100k per day.

    I don't penny people and I mostly use market orders except to exit @ a profit. I find the specialist to be fair and if I get burned, it's usually cause I mi-read the buying or selling taking place.

    I've got a question for u guys.

    Lets say I want to make between 15 and 40 cents on a thin stock. How many shares can i buy riding on the coattails of the money thats taking it there?

    I'm thinking 500 shares max on the ones under a 1 mil avg volume.
    #10     Aug 20, 2003