So this guy was a specialist. It is very unusual for a specialist to participate on ET, in the order execution forum, and to acknowledge openly that he is or was a specialist. My advice, especially to new traders, is to pay close attention to what this fellow says, because you might learn something from him and get a perspective to which you would normally never be exposed. I would also advise that you should approach what he says with careful suspicion and skepticism, rather than uncritical belief.
JimRockford I would approach everyone on this site with suspicion I can only answer as to what the rules and procedures were ~7 years ago. Obviously things change, frankly, I don't believe you would have had these problems without decimalization providing more price points and more gray areas and more confusion. I have no dog in this fight though, but do believe most stop orders are best left on the book. I might also add that many brokers send orders to regional exchanges, then when the orders are executed improperly and the customer is ripped off they blame the horrible specialist. Do not compare a regional book with a NYSE book. As far as NYSE being self-regulatory you are correct. I had some trades that I was so furious with that I sent them to market surveilance. They ruled for the Specialist, acting as my agent. Great. Things happened with decimalization that was unexplainable. I really don't think the exchange was prepared for the moves but shotgunned them in to hurt and embarras the NASDAQ. As far as the present investigation, I kind of think the NYSE and the boyz at GS have sold out to self interest. they have determined NYSE is worth more as an ECN. Why would you even have a computer system in place that would allow a specialist to purchase stock at a lower price than orders on the book? Now in regard to price improvement. I am really not sure why you would possibly disagree with the advantage provided by the NYSE in giving price improvement to "LIQUIDITY ADDING" orders. That is orders on the machine before 9:30 and also orders left on the book outside the NBBO. If I am going to leave an order on the book all day, I want the chance to receive price improvement if a print goes on at a giant discount or premium. I do agree however that I have very little interest in price improvement when my order is "seeking liquidity". I can see a quote, and I enter my order accordingly. I do not want to miss the market while this guy tries to get me a better price. As we know, invariably it traded ahead.
I am glad we are getting a former specialist's participation on this thread. I do not disagree with the idea of price improvement, in principal. I disagree with corruption in the way it is done, and in the way it is marketed as an incentive to trade on corrupt exchanges. Could you clarify what you meant, when you asked your question about "why would you even have a computer system in place that would allow..."? I just couldn't figure out what you were saying. Thank you.
I think the Nasdaq needs a one price opening. I also don't understand the value of my leaving an order on a exchange or ECN that allows the contra side to clear the book at each price level to get a print on at a premium or discount. Two small points. I do however agree with the notion that when I am seeking liquidity, I value immediacy rather than the chance at price improvement.
Getting back to the original issue, can the spec, in fact, see stop orders that are placed via DOT (before they are elected)? cstu? If so, how can they justify this? I see no reason to reveal them. If not, as I suspect, any talk of stop-running based on seeing the stops is baseless, at least with respect to orders sent via DOT (which applies to probably 99% of the orders sent by traders here on ET).
I guess the answer goes back to the original question of does your broker transmit orders to the exchange or hold stop orders internally. If they go to the exchange, the specialist will see them. Remember, and I am sure someone will chime in that they can't be trusted, the specialists first obligation in this instance is to act as your agent. Clearly they would have to see an order to accomplish the goal. For instance. say you have a 10000 share stop order at 50.1. Also the 50.1 bid is for 2300. There is 10000 at 50.15. If someone want to sell 10000 you would be disadvantaged if they were not aware of your order. Most likely the seller would sell 2300 at 50.1 and the remaining 7700 lower where your newly elected stop order (market order) would trade along with the original market seller. Were the specialist to buy any stock at 50.1 (the electing trade), they would be obligated to fill you at the same price regardless of how big your order is. Certainly, you would need to have the order visible to act as agent.
Quote from cstu: If they go to the exchange, the specialist will see them. ... Certainly, you would need to have the order visible to act as agent. Just to confirm, you, as a spec, could see stop orders on your screen that came in via DOT (not that were given to you by floor brokers or other proprietary methods)? If so, this contradicts what others have said, and is disappointing. I don't expect or need the spec to act as my agent for a stop sent electronically. I just need a market or limit order to appear when the stop price is triggered, just as if it resides on my broker's server (or my machine), and gets sent to DOT when elected. If I wanted a human agent, I'd use a floor broker.
If that is disappointing then stick to OTC or a program which sends a market order to the floor when your stop is triggered. It doesn't matter whether you send your order electronically or through a human floor broker some types of orders go into the specialist's book such as Opening Only, Market On Close, Stop Market, Stop Limit, Sell Short, etc. Limit orders left for longer than 5 minutes also go 'on the book' as far as I understand. The main thing is to know the rules of the game. If you don't like the rules play somewhere else like OTC only or the horse track or Vegas.
With the exception of stops, all those types of orders obviously go to the book - they have to because they are live. Stop orders are NOT live. AFAIK, in most markets, it's illegal to ask a floor trader about stops he's holding, and it's illegal for him to answer you. I'm surprised if the spec and clerks are effectively immune to this basic ethical protection of customers' interests.