NYSE Front-Running needs to be addressed

H

hayman

I am a staunch proponent of getting rid of NYSE "price improvement", as part of the NYSE overhaul. "Price improvement" equates to front-running, and to "price disimprovement" for those who use Limit Orders. The front-running activities of Specialists and floor brokers has largely been responsible for the death of the big block Limit Order. This, in turn, has helped reduce liquidity for the NYSE.

"Price Improvement" is a direct manipulation of the natural laws of supply and demand of the marketplace, and is without question, the biggest flaw in the entire open outcry system. Price Improvement always existed, but has become the biggest contributor to Specialist firm profits since the invent of decimalization, according to a NYSE Specialist acquaintance of mine. Specialist/Floor brokers no longer have to improve prices by an 1/16th (.0625 cents), but can get away with improving at the cost of only .01 -- all for their benefit !!!!!!!!

Why hasn't this issue been addressed of late ??? I have not heard a breath of this mentioned, in all the talk of recent reform.

Here is a very interesting link, posted by a very reputable Sr. Portfolio Manager, which describes the entire problem in better detail:

http://www.traderbulletin.com/stories/storyReader$770

I suggest that everyone write to the NYSE, SEC, and NASD to complain about this archaic, and highly biased system.

Certainly, a fair compromise, would be to regulate price improvement to be at least a .05 improvement, when it occurred.
Alternately, getting rid of it totally would also be a fair compromise.

Price Improvement = Front-Running .....no if, ands, or buts !!

 
My view is even simpler....

Let's say you have one pie to split....

1) The buyer...the seller...the middleman...

2) The buyer...the seller...

Electronic trading is closer to 2)

The specialist system is 1)

Is this not clear to politicians...traders...etc...?
 
ABSOLUTELY AGREE...PENNIED 65-70% OF THE TIME (by spec only). It's been getting worse over the past few months.

From your previous posts, hayman, I really wonder if we're trading some of the same stuff.
 
Yes, worse over the last 3 months for me. I trade mostly (but not all) thin liquidity stock and bond funds on the NYSE. Still making money, but I estimate that the front-running is about 30% worse these last 3 months, which equates to reduction in income.

Another friend of mine who rides the Long Island Rail Road, told me that he rides the train home with a bunch of Specialists, and they laugh and joke boastfully, about how they screwed such & such today.

Sorry, but working for a profit and having to "maintain an orderly market" are diametrically opposed principles.....they don't go together......why are the regulatory authorities just turning their cheeks consistently on this one.....are they on the take ?????

I have so much material, and so many documented examples of this behavior, I'm definitely going to write a book to expose all this......just have to find the time.
 
I would like to put out the following for you all to review, and for commentary:

After reading the above, I wondered what your comments might be about the BOX...the Boston Exchange's option trading system that just started that not only allows, but encourages Price Improvement via their 3 second rule. ?? The electronic trading elite seem to think that this will make for a much better pricing structure, and therefore take liquidity away from the CBOE, AMEX, and the ISE.

www.bostonoptions.com

Back to the original question of price improvement. You might think about the "not held" orders held by brokers. The "market orders" that are held by brokerage firms (for execution at their relative "leisure"). Are not "market orders" simply orders looking for the best price (and most timely)? Yet, no serious trader would use market orders after they understand how the system works.

I noted that decimalization was mentioned as another of the nails in the coffin of the NYSE...is it really better to have a full 6.25 cents "given away free" to the Specialist? Yes, many of us (traders) would love to "go back to the archaic system" of fractions for our own greedy purposes....but is that really "fair" to the public / retail traders who seek better pricing?

There are many "flaws" in the Specialist system, some real, some perceived. Without the "centralized market system" (I suggest) we face a much bigger concern than the potential for being "pennied" by the "Specialist" by those who try to extract money via trading....not to those who are suppesed to be "protected" by the government (the "widows and orphans" and their 401(k) plans, etc. The Electronic system's big (real) flaw is that each and every individual can simply "turn off" their computer and leave the market stranded with no "captain" - and this concern is a real one, we saw it back in 1987 (a lifetime ago to many, but a time when the public was not served well).

Open discussion and debate over how to make changes are certainly the way improve the overall marketplace. I encourage you all to continue to offer alternatives without singular purpose...alternatives that do not favor the few with high speed access to every tick...alternatives that view all sides of the equation, including having to put your own money on the line to make these, taken for granted, "fair and orderly" markets. Surely missing out on a penny or two once in a while, although quite irritating to we (serious) traders, is a small trade off for having a highly efficient place to trade.

Keep the ideas coming....I am in constant contact with those "powers that be" ... and like to carry with me valuable input...and hear the resulting responses.

Don
 
just curious if anyone else has noticed this:

the first forty minutes of the day feels like the specialist just throws his hands up in the air and lets the stocks trade on their own; at least in the stocks i focus on. but around 10:10 to 10:15 there is a noticable difference in the way the stocks trade, i start feeling that human interference again. i've noticed this for a couple of months now and have to admit those first 40 minutes are much easier. i probably make 60% to 70% of my total day during that period.
 
Quote from Don Bright:


The Electronic system's big (real) flaw is that each and every individual can simply "turn off" their computer and leave the market stranded with no "captain" - and this concern is a real one, we saw it back in 1987 (a lifetime ago to many, but a time when the public was not served well).

Don
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But Don, wasn't the issue in 1987 attributable to market makers not picking up their phones rather than shutting off their computers? I still have more faith in the electronic markets (with exchange oversight in case of an electronic malfunction, no not COCO :D) and prices seeking their own level. The key is simply having access to the exchange, even if buyers decide that they won't step in until a given instrument has lost 50% of its value. God forbid there is a day when nobody wants a share, but that's a market -- look at the ensuing recovery after the 1987 crash. Sellers panicked and they lost, and buyers (even my sweet old mother) bought these shares and were handsomely rewarded.

The bottom line seems to be capital commitment, and I don't think anyone should ever be required to commit their capital -- ever. Hence, specialists are obsolete - we need the volatility anyways.
 
Yeah, kinda

Spec. needs to figure out direction & who to penny first!

I make most of my money near the open as well........but thats largely do to the biased gap opens the spec will do to set himself up for a good day & get a piece too.

Other times I have the damn stock open .01 in front of me 65% of the time.....cause he thinks he can dump on me if it goes against. Look to see where stocks open, hmmmm, always infront of a block, coincidence??!!
I think the biggest problem is in illiquid securities, the big NYSE stocks are too tight to realize nastiness that the rest of the NYSE issues face.



Quote from C Robinson:

just curious if anyone else has noticed this:

the first forty minutes of the day feels like the specialist just throws his hands up in the air and lets the stocks trade on their own; at least in the stocks i focus on. but around 10:10 to 10:15 there is a noticable difference in the way the stocks trade, i start feeling that human interference again. i've noticed this for a couple of months now and have to admit those first 40 minutes are much easier. i probably make 60% to 70% of my total day during that period.
More...
 
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