Small Order Execution System (SOES)

The public, which includes online Internet traders, always buys high

on the ask and sells low on the bid, hoping the stock will move higher.

Market makers and professional traders always have had the advantage

of buying low and selling high. SOES is an electronic trading system

that is designed to execute public market and limit orders. I use

the term public because SOES cannot be used by institutions to trade

their own in-house accounts. If you use the SOES system, you can buy

on the bid and sell on the ask. This is because the market makers

must fill the first electronic pulse that hits their best bid or ask price.

This is known as the inside market. The speed of execution on these

orders is measured in seconds. It is mandatory for all registered market

makers to honor SOES orders. Since they are willing to buy and

sell on both sides of a market in a given stock, they have to post size

(number of shares) for the bid and the ask. The correct terminology

for this is tier size. It ranges between 200, 500, and 1,000 shares. At

this point, the market maker begins to play a little game with you,

called "truth or lie." You have to figure out if the market maker is posting

his or her required tier size or if the market maker is a net seller

or buyer of the stock. One thing for sure, the market makers will try

to hide their true intentions as long as possible.

The largest number of shares you can buy or sell on the SOES

system is 1,000 shares. There have been discussions of increasing

the number of shares you may buy on the SOES system, but as of

now, 1,000 is the maximum.

SOES routing is the second most useful tool for traders who

want high-speed execution when buying and selling. SOES does,

however, have some restrictions that must be considered when you

are routing your trades through the system. Because market makers

must maintain both sides of the market and honor the first electronic

pulse (order) that hits their bid or offer (ask), SOES has the

following rules.

The Rules of Engagement: When You Trade SOES, It's War

SOES has what is known as the five-minute rule. If you buy, for example,

1,000 shares of stock, you have to wait five minutes to buy again on the SOES system. This in my opinion is the biggest limitation

of the SOES system. If you wanted to turn around and sell that

same 1,000 shares you could, but after you do, you will have to wait

another five minutes to sell. The five-minute rule applies to the buy

and the sell. If you forget and try to sell or buy when the five-minute

rule is in force, the system will cancel your order. About now you

are saying to yourself, "Forget it, this SOES stuff is a pain in the

assets." Do not worry, I have the answer for you. In the previous

paragraph I said, "SOES routing is the second most useful tool for

traders who want high-speed execution when buying and selling."

The first is Island. You can use the ECN Island to get around the

SOES five-minute rule. For example, you buy 500 shares on the

SOES system, and a minute later you want to buy 500 more. To

accomplish this you route a buy order over Island for 500 shares,

and presto, you are filled. Island has no restrictions on size or time

execution. You can then sell 1,000 shares on SOES or use the ECN

Island (ISLD).

I live in the San Gabriel mountains overlooking Los Angles. If

you look into the distant night sky, you will see a string of beautiful

lights. These lights are large commercial passenger jets on a

flight path to land at Los Angeles International Airport. They line

up for over 300 miles on their approach to Los Angeles International.

Keep this image in your mind as we address another SOES

problem.

You are one trader among thousands using the SOES system.

You are all using the same system to place your buy and sell orders.

Remember, market makers are on both sides of the market, and

they are required to fill the first electronic pulse that hits the inside

market. If your pulse is not the first, you are filled in the order

received. In other words, you line up and take your turn to land on

the bid or the ask. This leads to partial fills. If your order is not executed

by the first market maker, the SOES system will seek out the

next market maker and place you in line. Just as in grade school,

you can get into trouble while waiting in line. If you place a SOES

limit order and the market maker lifts the offer, your order is canceled.

Chapter 5 offers an example of using a SOES limit order in

shorting stock.

Seventeen seconds can feel like an eternity when you just hit

the bid and nothing happens. Hit the bid means that you just sold

stock at the current bid price if the market maker is in what is called

a refresh. Market makers have 17 seconds once they have filled their

SOES obligation to decide to stay with the price or change the price.

Just when you thought it could not get any worse, it did. Market

makers have access to Nasdaq Level III information. This tells them

where and how many buyers and sellers are gathering. They also

have access to what is known as SOES buster software. This enables

the market makers to shake out the day trading scalpers who typically

trade for 1/16 and 1/8 of a point.

Even though SOES has some definite disadvantages, its speed

and reliability makes it one of the short-term traders' preferred

routing systems. To put all of this in prospective, sing the following

to the tune of Kenny Rodgers song "The Gambler."

You got to know when to hold 'em, know when to SOES 'em, know when to

hit the bid and sell on the ask. You never count your money when sitting on

the open.... There will be time enough for counting when the trading's

done.

The public, which includes online Internet traders, always buys high

on the ask and sells low on the bid, hoping the stock will move higher.

Market makers and professional traders always have had the advantage

of buying low and selling high. SOES is an electronic trading system

that is designed to execute public market and limit orders. I use

the term public because SOES cannot be used by institutions to trade

their own in-house accounts. If you use the SOES system, you can buy

on the bid and sell on the ask. This is because the market makers

must fill the first electronic pulse that hits their best bid or ask price.

This is known as the inside market. The speed of execution on these

orders is measured in seconds. It is mandatory for all registered market

makers to honor SOES orders. Since they are willing to buy and

sell on both sides of a market in a given stock, they have to post size

(number of shares) for the bid and the ask. The correct terminology

for this is tier size. It ranges between 200, 500, and 1,000 shares. At

this point, the market maker begins to play a little game with you,

called "truth or lie." You have to figure out if the market maker is posting

his or her required tier size or if the market maker is a net seller

or buyer of the stock. One thing for sure, the market makers will try

to hide their true intentions as long as possible.

The largest number of shares you can buy or sell on the SOES

system is 1,000 shares. There have been discussions of increasing

the number of shares you may buy on the SOES system, but as of

now, 1,000 is the maximum.

SOES routing is the second most useful tool for traders who

want high-speed execution when buying and selling. SOES does,

however, have some restrictions that must be considered when you

are routing your trades through the system. Because market makers

must maintain both sides of the market and honor the first electronic

pulse (order) that hits their bid or offer (ask), SOES has the

following rules.

The Rules of Engagement: When You Trade SOES, It's War

SOES has what is known as the five-minute rule. If you buy, for example,

1,000 shares of stock, you have to wait five minutes to buy again on the SOES system. This in my opinion is the biggest limitation

of the SOES system. If you wanted to turn around and sell that

same 1,000 shares you could, but after you do, you will have to wait

another five minutes to sell. The five-minute rule applies to the buy

and the sell. If you forget and try to sell or buy when the five-minute

rule is in force, the system will cancel your order. About now you

are saying to yourself, "Forget it, this SOES stuff is a pain in the

assets." Do not worry, I have the answer for you. In the previous

paragraph I said, "SOES routing is the second most useful tool for

traders who want high-speed execution when buying and selling."

The first is Island. You can use the ECN Island to get around the

SOES five-minute rule. For example, you buy 500 shares on the

SOES system, and a minute later you want to buy 500 more. To

accomplish this you route a buy order over Island for 500 shares,

and presto, you are filled. Island has no restrictions on size or time

execution. You can then sell 1,000 shares on SOES or use the ECN

Island (ISLD).

I live in the San Gabriel mountains overlooking Los Angles. If

you look into the distant night sky, you will see a string of beautiful

lights. These lights are large commercial passenger jets on a

flight path to land at Los Angeles International Airport. They line

up for over 300 miles on their approach to Los Angeles International.

Keep this image in your mind as we address another SOES

problem.

You are one trader among thousands using the SOES system.

You are all using the same system to place your buy and sell orders.

Remember, market makers are on both sides of the market, and

they are required to fill the first electronic pulse that hits the inside

market. If your pulse is not the first, you are filled in the order

received. In other words, you line up and take your turn to land on

the bid or the ask. This leads to partial fills. If your order is not executed

by the first market maker, the SOES system will seek out the

next market maker and place you in line. Just as in grade school,

you can get into trouble while waiting in line. If you place a SOES

limit order and the market maker lifts the offer, your order is canceled.

Chapter 5 offers an example of using a SOES limit order in

shorting stock.

Seventeen seconds can feel like an eternity when you just hit

the bid and nothing happens. Hit the bid means that you just sold

stock at the current bid price if the market maker is in what is called

a refresh. Market makers have 17 seconds once they have filled their

SOES obligation to decide to stay with the price or change the price.

Just when you thought it could not get any worse, it did. Market

makers have access to Nasdaq Level III information. This tells them

where and how many buyers and sellers are gathering. They also

have access to what is known as SOES buster software. This enables

the market makers to shake out the day trading scalpers who typically

trade for 1/16 and 1/8 of a point.

Even though SOES has some definite disadvantages, its speed

and reliability makes it one of the short-term traders' preferred

routing systems. To put all of this in prospective, sing the following

to the tune of Kenny Rodgers song "The Gambler."

You got to know when to hold 'em, know when to SOES 'em, know when to

hit the bid and sell on the ask. You never count your money when sitting on

the open.... There will be time enough for counting when the trading's

done.