Island Short Sales

Originally posted by Vinny1
DAT, i'm not sure if you answered my question a couple of posts ago, so i will rephrase the question : You enter your Island short order on an upbid at a price below the best bid(which doesn't fill since there are no matching Island bids and it is now being displayed on level 2 a penny above the best bid. All the uptick bids get hit by other ECN's and Supersoes users and now the new bid becomes a downbid.Now when this new bid becomes a down bid, what happens to your order then? Does the Island order cancel or does it just follow the bid down tracking a penny above the best bid. And if it does track down, will Island orders that come in to buy get price improvement by being able to buy at your originally entered low price or will they only get filled if they put in a buy order at your currently displayed Island offer price or higher?
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Vinny,

THe ISLD order stays live and is re-displayed a penny above the bid (presumably the old bid price that just printed through). The anwer to your second two part question is yes to both parts. If a ISLD buyer takes the offer, he will get filled at your lower original short sale price and get price improvement. Or, if he passively enters a bid below the current bid but at or above your short sell price (perhaps waiting for the stock to trade down to his price) he would get a surprise instant fill....and probably panic for a second. Did you ever go to join the inside bid on ISLD and get an instant execution where the bid never even hits the L2? This is becuase there were ISLD sell orders crossing the market (below the bid) that were being displayed at the offer price and your bid matched instantly with them. In essence your passive bid was really an aggressive order....you just didn't know it at the time :)
 
So if the buyer gets price improvement by buying at your originally entered price when the current bid is a downbid, doesn't that violate the Nasdaq uptick rule since you are shorting the stock during a downbid? I would have figured that your short sale order that is now tracking a penny above the best bid would only get filled if a buyer came in with a buy order at your currently displayed offer price or higher. Any thoughts?
 
Anyone hitting your short sale order chasing down the market will receive full price improvement (i.e. 20.00) regardless of what L2 shows at the time. The market changing to a downtick before you are filled does not change anything about how ISLD handles your order. Unlike other ECNs ISLD does not have any native order handling logic when it comes to short sales of Nasdaq stocks (it does for listed). It's the brokers responsibility to ensure that Nasdaq orders comply with short sale restrictions at the time of submission to ISLD. Not all brokers get this right. E.g. with IB it was possible to short all downticks via ISLD for the last two years. Unfortunately, it seems they finally caught on and fixed that bug a couple of months ago.

Dave
 
You raise a very perceptive point which I have often wondered about and debated with other traders. THe Naz uptick rule states that one "shall not effect a short sale at or below the bid when the current bid price is lower than the previous bid price"....

The key words here are "effect" and "at or below".....

First off, the fact that the rule says you cannot short at or below the bid on a downbid implies that you can short at OR BELOW the bid on an upbid. THus when there is an upbid of $50.00 I can sell short to a bidder at $49.99.

The second part of the rule is more vague IMO. What does "effect" mean?! I have unsuccessfully searched the NasdaqTrader.com site at length looking for more descriptive statements. Common sense tells me that when I enter an order to buy or sell, I have no control on how long or when the order is actually executed. It may take the action of another trader, technology may lock up, be delayed, fail, etc. Therefore should my obligation be to not initiate a short sale on a downtick-which I can control-or should it be to not have my offer to sell actually get consummated when there is a downtick-which I may not be able to control. I believe the former. But who am I to interpret the regulations huh?

All I know is that when using an ECN like ISLD, I can initiate a short sell order at a price below the bid when the bid is a bid uptick and it will stay live after the bid goes to a downbid. The fact that another trader may not take my offer for a second or two or more, even if it is after the bid uptick has gone to a bid downtick, is beyond my control. What am I supposed to do, watch the bid like a hawk and cancel as soon as it goes to a down bid?

Having said all that, there still remains an inconsistent characteristic in that a SOES limit order entered below the bid (or market order for that matter) when the bid is a bid uptick will autocancel (by the Naz) as soon as the bid goes to a down bid. THey just have to make it difficult on us don't they.
 
Thanks for your replies. I understand Island much better now. Correct me if i'm wrong, if i'm now using ARCA to short a stock at a price below the bid , i understand that if the bid is an upbid, ARCA will hit all the ECN's and market makers at that upbid and then offer your remainder a penny above the best bid. Now if ISLD or INCA come in to take that offer, i'm assuming they won't be able to since ISLD or INCA can't take offers outside of their own book. So is it true that you will only be able to short it if one of the proactive ECN's (ARCA,REDI,BRUT,BTRD,MKXT or NTRD) come in to take your chasing down offer? Can they get price improvement at your originally entered low price or will they only buy if they enter an order at your plus tick offer price or higher?
 
Originally posted by Vinny1
Correct me if i'm wrong, if i'm now using ARCA to short a stock at a price below the bid , i understand that if the bid is an upbid, ARCA will hit all the ECN's and market makers at that upbid and then offer your remainder a penny above the best bid.
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This is not right. Arca does not have the same crossed order handling like ISLD. If the sell is below the bid, a normal ARCA order will try to hit the highest (inside) bids first using its normal routing sequence (internal match, direct ECNS, etc). If it does not get a match for the entire order, it will hit sucessively lower bids down to your limit price below the bid, and it will keep on doing this until it is filled.

However there are "special" types of Arca orders that circumvent some of this such as NOW and IOC orders.

A NOW order seeks to fill the order ONLY via an internal match and via direct connections with certain market participants. It was designed primarily to avoid SNET preferencing of MM's in the pre-supersoes days.

An IOC Arca order will fill the order only when there is an Arca contra order at the inside price, and immediately cancels if one is not there.


Originally posted by Vinny1 Now if ISLD or INCA come in to take that offer, i'm assuming they won't be able to since ISLD or INCA can't take offers outside of their own book. So is it true that you will only be able to short it if one of the proactive ECN's (ARCA,REDI,BRUT,BTRD,MKXT or NTRD) come in to take your chasing down offer?
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If your sell order were to end up displayed as an offer (which again it would not in your hypothetical example), yes it would require a matching/crossing bid from a proactive ECN or an internal ARCA buy order to get filled.

By the way, I was unaware that any ECN other than Arca/Redi had proactive functionality....yet you listed BTRD, MKXT, BRUT and NTRD...where did you hear this?

Originally posted by Vinny1 Can they get price improvement at your originally entered low price or will they only buy if they enter an order at your plus tick offer price or higher?
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If original sell below bid is not yet filled, and a higher bid subsequently omes in from a proactive ECN, there is a chance that ARCA- while seeking liquidity by re-routing balance of sell order- could direct residual volume to the new incoming bid. In this case you as the seller would get the price improvement since ARCA would match your remaining sell volume with the new incoming buy volume at a higher price than your original sell below the bid price.

Wow...too early in the am for this. Maybe that's why Arca (and others) came up with the smart routing to begin with....so normal people won't have to know all this.
 
DAT, you mention: "If the sell is below the bid, a normal ARCA order will try to hit the highest (inside) bids first using its normal routing sequence (internal match, direct ECNS, etc). If it does not get a match for the entire order, it will hit sucessively lower bids down to your limit price below the bid, and it will keep on doing this until it is filled." This is correct if you are just selling a long, but this can't be correct if you're shorting, because from what i have read, ARCA and even REDI and INCA won't short on a downtick. It will offer you a penny above the bid (if it's a downbid) and follow the bid down until an uptick to execute. This is where i saw this info....http://www.hardrightedge.com/work/orderrouting.htm...look under section Short Sell Orders.
If anyone can add something else,please feel free to do so.
 
I used to only trade NYSE stocks where on that market you could only short on a plus tick or a zero plus tick. So it looks like from what i have read and learned, it is much easier to short a Nasdaq stock where you only need a plus tick bid to short at or below the bid.
 
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