Voodoo posted this link under Rule Changes but I thought more people would see and discuss it in the main Trading forum: http://nasdaqtrader.com/trader/news/2001/headtraderalerts/hta2001-158.stm Quite simply, in a matter of months they are already eliminating one of the main benefits of SuperSOES, that a market-maker had to post a 1000-share display if they were going to use reserve size. In other words, if they were going to hide their true size, they had to post at least 1000 in Level 2. After Nov 1 they will now be able to only post 100-share size (just like they could with SOES), and still hide a reserve of whatever size they want. Damn, screwed again. Nasdaq® has filed a rule proposal with the Securities and Exchange Commission (SEC) to eliminate the 1000-share display requirement when using SuperSoesSM reserve size. Nasdaq expects to implement the rule change effective Thursday, November 1, 2001. The proposed rule change eliminates the current requirement that a quoting market participant display 1000 shares when using Nasdaqâs reserve size feature. Effective November 1, 2001, SuperSoes participants will only be required to display a minimum of 100 shares, or 1 round lot, when using the reserve size feature. ...Formerly, the rule required that the refresh increment be set to at least 1,000 shares (10 round lots). Effective November 1, 2001, the minimum value for refresh increment will be 100 shares, or 1 round lot.
once you know he's reserve size, you can still soes him for 5k and get filled, so I don't see what the issue is.
You'll be looking @ 100 partials if there is no reserve. in other words you'll most likely revert back to ECN's for primary fills.
P2, But that's just it, you don't know his reserve size. And you don't even know if he has a reserve size. Prior to this latest change, if he didn't post at least 1000 shares he couldn't have a reserve size -- in other words, if he wanted to hide something he had to post at least 1000 shares. Now all he has to post is 100 shares.
THe main change that helped us regarding SS and reserve volume was NOT the requirement for the 1000 share display if reserve is posted but the fact that SuperSOES orders will execute directly against reserve volume coupled with the elimination of the 17 second interval delay between SOES executions to a MM's quoted volume. True in the old SOES days, MM's could stall a stock (or hold it up) potentially by posting a measely 100 share quote, but the reason this worked was as follows. Assume MM posted a 100 shares on the offer (assume he was the only one), and 5000 in reserve and 5 SOES buy orders are entered for 5000 shares each. So 100 shares from the first 1000 share order executes immediately and the remaining 900 plus the other 4 1000 share orders are held in queue for 17 seconds, at which point the MM's volume would refresh, taking another 100 shares from the reserve volume again and another 100 shares of the order would execute against the 100 share quote, and so on and so on. So think of what could happen when a MM sits there taking 100 share executions at a time every 17 seconds. THe SOES queue backs up with lots of orders not being executed, other participants who want to sell get inpatient and join the MM at inside offer, others get more inpatient and start wacking the bid....bingo MM reverses the stock. Fast forward to now same scenario. As soon as the 5 1000 share orders are entered, they all execute immediately against the 100 share quote AND the 5000 shares in reserve and the MM is blown out of the offer in the blink of an eye. The only thing the 1000 share display requirement did was make it totally obvious that the MM had reserve as you could watch the quote go 1000, 800,300,1000,500,1000,300,100,1000 as SOES orders of various sizes are executed against the 1000 share quote that keeps refreshing. So after Nov 1, if you see a MM sitting at the offer and the offer prices are printing on the T & S, you can pretty well assume that many of the prints will be via the SOES system, meaning the MM has reserve since he would still be sitting there. We'll just have to watch a little closer. Finally, I never saw any great benefit in knowing it anyway because I still never knew if it was 5000 or 50000 shares in reserve....and as long as a MM was there I know I can get an immediate SOES execution which was certainly not the case under old SOES.
Here's the problem as I see it (and I appreciate your explanation DATTrader). First, the SuperSOES regulation, prior to this latest change: The order will go to the Market Maker at the specified price. The order will split if necessary among available participants. If there are a remaining number of shares to fill, SuperSOES will target the Market Makers with reserved amounts (after itâs targeted the participants posting, first). Maybe I'm misinterpreting this, but let's take an example of how the new reg will work. Say I have an order for 1000 sh, and at the inside (in this order) is an MM showing 100, an ECN showing 200, and another ECN showing 300. And let's say the MM has a reserve. Now if the MM were required to show 1000 in order to have a reserve, bingo, I'd have been filled. But with my example above, first I take the 100 from the MM, then I attempt to take the 200 from the 1st ECN (assuming I get there first), then I attempt to take the 300 from the 2nd ECN (again, assuming I get there first). And, finally, whatever I haven't filled goes back to the MM (assuming he hasn't moved off the inside) and fills from his reserve. In other words, it doesn't even get to his reserve until it's first targeted everyone at the inside. Seems like a very roundabout way to try to get shares that was done much more simply when the MM was required to post 1000. Obviously the new rule was initiated by the MM's because they didn't like having to post 1000 in order to have a reserve. Now I would agree with you and P2 that the new implementation wouldn't make a lot of difference if, using my example, after hitting the MM for his displayed 100 shares it immediately pulled the remaining 900 shares from his reserve (if he had one). If you are certain it will function that way then I've got no serious complaints. But if the fills happen according to my scenario then it will be a royal pain in the keister.
I think that the reason the NASD is doing this, is simply to compete with ecns. Up to now if a mm wanted to hide stock and only show 100 share size the only recourse available would be to post the order through an ecn, that probably took away some additional business from NASDAQ. On the other hand I think that the new rule will make trading more transparent, since it will show exactly who the seller or the buyer is, vs an ecn that shows you nothing. shneed
Shneed-If a MM has size to hide, to me thats multiple thousands of shares and under either scenario (old or new) he was not forced to show it as the reserve volume was only known to him and the Nas. Being forced to show 1000 when he may have had 20,000 vs being allowed to only show 100 does not create any real benefit IMO as he is still able to "hide" the 20,000. Magna-I agree with your interpretation in your post but your example is obviously assuming the use of some "smart" or "best execution" route as SS in itself would not route any of the order to ECN's at the inside price. My observations lead me to believe that when I am getting filled via ARCA (the only thing I use that would potentially split an order between ECNs and SuperSOes) it is almost always from ECNs anyway and rarely gets routed to SS. The reality is that under SS, MM's rend to stay away from the inside price levels for any extended period of time as they dart in and dart out with small size and usually no reserve, wary of being SuperSOESd to death with 0 second interval delays. Thus that is the good thing about SS, I know now that if a MM is there when I hit my SOES hot key, I will be filled as he would not be there if SOES orders against his quote were already live and he had no reserve.
The reason it's better, is that I would rather see if its a one of the larger mm's that is buying or selling the stock or just a small regional one. Plus I can look out for that mm later on. I cannot do the same thing with an ecn on the bid or offer since I don't really know who is behind it. shneed
DATTrader, OK, forget ECN's being part of the mix. Let's assume there's three MM's at the inside, all posting 100 shares. If I SuperSOES for 1000 shares, does it hit the first one for his 100 shares and stay with him for the remaining 900 shares if he has a reserve? Or does it take MM1's 100sh, then MM2's 100sh, then MM3's 100sh, then go back to MM1 to see if he has a reserve, etc. This will probably clear it up for me!