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The following is a discussion of Arca, Snet, SOES, and Island order routing between "Jawd" and "Sword". It ends with Rules of Trading by Sword. Enjoy.
I need clarification on a point from someone who has been trading with MB Trading for awhile. Yesterday I placed an order to buy a stock via ARCA. It was a limit bid 1/16 below the current bid at the time. There were two MMs above me. Before the bid dropped to my price there were already three other MMs lined up under me. When my price was hit the first two market makers got filled and then I was on top. I seemed to sit there a long time and the whole while I could see trades going at my bid price but I wasn't getting filled. Finally the three MMs under me disappeared, the bid dropped another 1/16 and I received confirmation that I got filled. My question is, once I get to the top of the bid list, shouldn't I get the next fill? It looked to me that the MMs under me all got their fills and then they filled me just as they were ready to lower the bid. What am I missing here?
I've had the same experience many times on Level 2 with AB Watley (which does not use ARCA) and LIVETRADE.com (which does use ARCA). Another question to add: often INCA and ISLAND bids/asks are at the top of the list during trading hours and/or at the close but it is the postings from Market Makers which are beneath the INCA and ISLAND bids/asks that are reflected in the bid/asks for a given security. Why?
Whether you are above or below MMs at the same price, it makes no difference as to whether or not you get filled. The level-II screen is an indication of who is offering what - it is not an indication of who is NEXT to be served. MMs are not under any obligation to buy/sell from/to any ECN or other MM unless you hit them with a SOES order up to the quantity they offer.
David:
In your example, when you placed your order on ARCA, the system handled your order like a Selectnet broadcast. In other words, all MMs could see your bid. There is no difference between ARCA and Selectnet broadcast when you are bidding at or below the best inside bid price. On the other hand, if you were bidding at or above the inside offer, ARCA would preference your bid to the most active MM and only that MM would be able to see it.
But in the case that you described, it is not clear whether or not the inside bid dropped below your bid for a time before you got filled. If it did for more than a few seconds, the left column of the LII screen would have changed from "O" to "P" indicating that the bid was now preferenced. ARCA is a pretty sophisticated execution tool.
But it cannot allow you to make markets! Therefore, the broadcast best bid and ask will never be affected by the price you offer. This is in contrast to ISLD, where you are, in fact, making a market. If you split the best bid/ask spread on ISLD, your price will be displayed across the nation instantly (or as fast as your ISP allows)! Furthermore, other traders using ISLD can hit your price. However, on ARCA, no other ECN can hit your price. So there are some limitations to ARCA.
But getting on to your question.....
1. Bids are not filled in order on the NASDAQ exchange. Any MM at the inside bid can be filled at any time.
2. Even if you were the only bidder at the inside bid, you still might see trades occurring at your price and not get filled yourself! This is because other market makers might want to continue to trade at your price even though they are displaying bids below yours. They are taking care of their regular customers and are being competitive.
Sword, I don't understand why you say ARCA does not allow you to make a market. It is true that it goes through a preferencing sequence first, but if that fails, it then displays your bid on the TNTO ECN.
True, but as far as I know, TNTO cannot be executed against except by other MMs. No other ECNs, including ARCA, can execute against it. Therefore it is similar to a Selectnet broadcast since only MMs can execute against it. With respect to visibility, it is different since anyone with LII can see TNTO, whereas my order will never be displayed anywhere on LII if I use Selectnet. If anyone knows any better, please correct me.
What is the definition of "making a market"? -- Displaying your price and making it executable directly without going through another market maker. The only tool I have at my disposal at MBT for doing this is ISLD.
With all of the limitations of ARCA, it is still a wonderful execution tool. I think it only fair to mention some of those in the context of the previous posts. You can use it as a "monster key." Suppose you have stock XYZ indicating 10 x 10 1/8. It is beginning to run up and you want to get on. There are no ISLD offers in sight. What to do? The quantity you want to buy is 2000 shares and the MMs are making markets in 300 to 500 share blocks. A SOES order would probably not execute since the run has started. You don't have time to find out who the best MM is to preference a Selectnet order. ARCA to the rescue. Put in an order for all 2000 shares at what you consider to be a fair price but not too high...maybe 10 3/8 (monster key order). ARCA has a table of the "best" MMs that it uses to select a preference and places the order. Only that MM can see it. It will be executed at the best inside offer and no higher. Of course, that may mean that you get 500 shares at 1/8, 1000 shares at 3/16 and the last 500 at 1/4 as the stock runs up. Or maybe you'll get all of them at 1/8. But you're in and you don't have to chase the stock with multiple bids and higher commissions.
In general, ISLD is preferred for lighting fast executions. But if there are no offers and you hate partial executions, ARCA is an excellent choice.
True, but as far as I know, TNTO cannot be executed against except by other MMs.
As far as I know, all ECNs, including TNTO, have to be accessible to trade against through SelectNet preference to all market participants, not just to MMs.
"…it goes through a preferencing sequence first, but if that fails, it then displays your bid on the TNTO ECN." Right. It is at that point that if you are splitting the bid/ask that the inside quote on level 1 screens across the country will reflect your price, since they will reflect the prices of any ECN and TNTO is an ECN. Thanks for the correction. Someone else on this thread asked about that earlier. What you will never see, of course, is any crossed bid displayed on level 1 since that bid will be preferenced and not broadcast. For example, on fast moving stocks like Dell, you'll sometimes see bids on ARCH displayed on LII that are substantially above the inside ask. These bids don't change the level 1 inside bid prices that are displayed. If the market moves to that price and the ask moves above it before it gets executed (happens sometimes), then ARCA is working your order automatically (i.e. will plug it into TNTO and broadcast it). Now the inside bid is yours and it displays on Level 1.
Normally, Selectnet is a lot slower than going to ISLD direct and so if there are existing ISLD orders at the inside ask, I'll use ISLD directly. But I never knew that I could route to TNTO through Selectnet. Sometimes TNTO is the only inside ask displayed. This offers a new opportunity for execution that I didn't know I had. Thanks!
Agree with you there. ARCA is not a very good choice IMHO, in a fast moving market going down. It's too slow because of the preferencing. (I do wish they would change that system. 30 second preference I think is too long. Also, I'd like to see the preference auto cancel if a TNTO order comes in). I prefer to get out before the buyers all dry up. If I miss that, then I go with SelectNet or SOES depending on the stock.
"Amen" on that one. The MMs have a real advantage. For example, on a stock that is dropping fast, a lot of sell orders come into their level III screens. They can see where the stock needs to be to achieve an order balance and they will give you the minimum price they can give. Suppose the market is at 20 1/2 x 20 5/8. A whole bunch of sell orders come in that they have to match. They know that there are a bunch of stop loss orders at 20. The main MM who deals in this stock is the only one left at 20 1/2. He has just executed a SOES order. He legally has 19 seconds to adjust his quote. He sees lots of selling pressure building up but just waits. There is a pause in the market action (the time and sales is quiet as a mouse). He evaluates the situation. Can he make it to 20? All of the other MMs are waiting to see what he is going to do. Bang! The T& S screen fills with blood at 3/8. Downticks again to 1/4. The MMs sell short from their own account. Downticks to 1/8. Fear rises in your heart. You want to get out. You place an ARCA order at 19 7/8, thinking that this will speed up the process by putting you at the top of the list to execute. Ha! No way. The order is preferenced to the top gun MM. He's got a whole universe of Selectnet, brokerage order flow and other orders waiting in the wings. Your order is added to the rest. He gets continually hit with SOES market orders. So he has all the time in the world to balance his account. He'll wait to sell you the shares until the price hits 20 and the bottom drops out with the stop loss orders. The stock dips to 19 3/4. You get executed (finally) at your price. My previous comments about using ARCA on a stock that is about to make a run are not to be construed to mean that it is a good tool for a situation like that described above. In general, I like to use ARCA for "medium to low" volatility situations.
But the story hasn't ended yet. The MMs know that the stop orders have now been executed. Most of them sold short from their own accounts at the beginning of he run (the downtick rule doesn't apply to them). The stock is now trading at 19 3/8. You got out at 19 7/8. You're so glad that you did! Wow, you saved 1/2 by getting out when you could.
Well, now the MMs need to cover their shorts, so they begin to buy back in. They execute at 19 3/8 to 19 5/8. Many late sellers are still coming in. They absorb this stock. They are now covered. The stock comes back to 20 1/2. And guess who doesn't own it anymore? Me and you!
This scenario is played out hundreds of times a day in the universe of NASDAQ stocks.
Now, here is a better story: Starting with paragraph 3: Bang! The T& S screen fills with blood at 3/8. Downticks again to 1/4. The MMs sell short from their own account. Downticks to 1/8. Fear rises in your heart. You want to get out. But you don't! And here is why: You actually know something about this company. You've been watching it for awhile. You know the balance sheet is strong. There is no negative news on the company recently. You know the price action, spreads, primary MMs and have a "feeling for the stock." You know this sector is in play and the market trend is rising. The base at 20 is a short term one that was established during the past couple of days. We are near the end of the day, when the MMs love to shake out the weak hands. "Bang! The T& S screen fills with blood at 3/8. Downticks again to 1/4. The MMs sell short from their own account. Downticks to 1/8. Fear rises in your heart. You want to get out." BUT YOU DON'T.
Instead, if you are a daytrader, you wait for the bounce! You know that it is much easier and more profitable to sell into a rising price. Your rule says, "Don't hold overnight on daytrading stocks." But there is time for that bounce. So you wait. The stock ticks upward, you get out when the action is subsiding on the BUY side. You make a market on ISLD at 20 3/8 while the stock is at 20 1/4 ask. You get your asking price. You got in earlier at 19 3/4. You make 5/8 on the trade instead of 1/8.
1. Stay in Control
....a. Internal Factors
............i. Avoid fear (don't overextend yourself)
............ii. Don't trade because you want to get even
............iii. Stop trading when you sense greed welling up
............iv. Don't trade when you are tired or depressed
....b. External Factors
.............i. Don't trade when your ISP or broker is experiencing problems.
.............ii. Stay flat overnight (to limit exposure to external news)
.............iii. Don't stay in trading positions while away from your computer
2. Trade good trading stocks
....a. Understand the underlying fundamentals
....b. Trade stocks that will have at least 3,000,000 shares traded
....c. Trade stocks that have medium to high volatility
....d. Stay out of stocks that have big spreads and small float
....e. Do most of your trading during the first hour, and last 1 ½ hours
3. Trade with good trading methods
....a. Use TA to define entry and exit points
....b. Stop loss quickly when the trade goes against you
....c. Avoid getting beaten out by MM shakeouts
4. Trade using appropriate trading tools
....a. Understand the different trading routes and what they can do
....b. Don't use Selectnet with a price far from the inside price
....c. Don't use ISLD to cross, use ARCA
....d. SOES only on slow moving stocks or when there are
at least 4 MMs at the inside price
....e. Preference in Selectnet with large volumes
....f. Join the bid or ask on ISLD where possible
5. Reward your hard work with a withdrawal
....a. Take 10% out for compensation per week of the profits
over and above the last week's equity
....b. Donate 10% from this amount to your favorite charity
or church (helps prevent greed)
....c. Put the rest in a bank account, not the brokerage
....d. Have a life outside of the financial markets (limit computer time)
-Sword
1. They occur most often at the end of the day. Reason? Daytraders don't want to end up with a losing trade so soon to the time of day that their rules say is termination time for all positions. MMs know this. 2. Look for consolidation around an integer price level; e.g. 200 for yhoo, 20 for EGGS, etc. There are normally lots of sell stop orders and buy stop orders at these levels put their by less knowledgeable investors. These are targets that traders and MMs will aim for. They will sell short in order to drive the price down to that level, it will be breached and the subsequent momentum will carry the price to levels far below their short sale prices where they will cover. 3. You mentioned volume as an indicator. Yes, this can be a sign. Contradictory with tight stops? Yes it is. Get a feel for where the shakes might occur and get out before the run happens, while the action is evenly divided between buying at the ask and selling at the bid (red/green are 50/50)and then wait patiently for the run. Then buy below the consolidation price level when the selling action slows (but doesn't reverse).
If you misjudge the situation and get caught in a run, wait and evaluate the situation. Is it likely a shakeout? Then you're better off taking the chance of staying in and waiting for the bounce. (Keep an eye on the indexes like the nasdaq composite and the dow jones to make sure that the run isn't a market crash.)
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