Try this: (Mike, check your PM)
www.stocktrading.com/hybrid.htm edit, revised link.
And this...
Let me start with a major change that I personally am not a fan of. This is the practice referred to as "walking the book". This will, in my opinion, greatly diminish the liquidity offered on the NYSE. For the last few decades, traders were given "price improvement" on their limit orders quite often during the day. A simple example is this: If the NBBO (National Best Bid or Offer) reflects $47.10 bid, $47. 14 offer, our traders would enter a $47.05 bid and perhaps a $47. 17 offer, and keep moving their bids and offers slightly away from the NBBO. When large orders would come in, the Specialist would accommodate them with a single trade at a higher or lower price. A buyer of 50,000 shares would pay $47.25 for the entire amount of shares, and anyone willing to provide liquidity (by having their orders already in the book) would be given the better price. In this example, our trader would have sold (short) the stock at $47.25. The additional benefit was that we were more often than not, trading "with" the Specialist, since he generally "accommodated" large orders by (in this case) selling along with the other orders in his book.
For the most part, our traders won't be leaving any orders on the NYSE any longer because of the new "walking of the book" rule. The 50,000 share buyer (above) might do this: Buy 1,000 for 47.14, another 1,000 at 47.15, perhaps another 5,000 at 47.17 (partly from us in this example), and then buy more stock at $47.20, 47.30 or even $47.50....at each price level. This would take away any incentive for our traders to provide this liquidity, and cause for a worsening of price levels. I am advising our traders to go elsewhere with marketable limit orders. Since some ECN's pay for providing liquidity, it only makes sense to send our orders to one of them.
All that being said, when one door closes another usually opens. Some of my people are already writing (or modifying) their programs to enter trades only when a certain, rapid, price change takes effect. This would put them into trades at the ends of these more volatile price moves. The other benefit will be to our "Pairs traders" (see www.pairtrader.com) , who focus more on pre-determined price level entries, as opposed to obtaining price improvement when providing liquidity.
As in an earlier article (Survival of the Fittest, adapt or die - TASC January 2003), we will continue to modify our trading strategies as the market evolves. I am hoping to put together a more detailed analysis of the new NYSE changes after we have some trading time behind us.
And...
The floor broker, as agent for larger institutional orders that frequently trade in Rule 127 fashion (in which a sweep-price execution is still possible) will still be able to provide price-improvement opportunities to resting limit orders entered by liquidity providers.
An HBC e-mailed me that there are other electronic ways for liquidity providers to get price improvement:
⢠One is the Discretionary e-Quote, which is basically an electronic manifestation of what the brokers can do manually in the crowd. The Discretionary e-Quote is pending SEC approval; some background about it is in our Hybrid Training Program booklet, Chapter 25, here.
⢠The other is via the specialist's use of algorithmic messages, subject to certain restrictions. Our training booklet has a chapter about that as well, Chapter 15, here.
Don
www.stocktrading.com/hybrid.htm edit, revised link.
And this...
Let me start with a major change that I personally am not a fan of. This is the practice referred to as "walking the book". This will, in my opinion, greatly diminish the liquidity offered on the NYSE. For the last few decades, traders were given "price improvement" on their limit orders quite often during the day. A simple example is this: If the NBBO (National Best Bid or Offer) reflects $47.10 bid, $47. 14 offer, our traders would enter a $47.05 bid and perhaps a $47. 17 offer, and keep moving their bids and offers slightly away from the NBBO. When large orders would come in, the Specialist would accommodate them with a single trade at a higher or lower price. A buyer of 50,000 shares would pay $47.25 for the entire amount of shares, and anyone willing to provide liquidity (by having their orders already in the book) would be given the better price. In this example, our trader would have sold (short) the stock at $47.25. The additional benefit was that we were more often than not, trading "with" the Specialist, since he generally "accommodated" large orders by (in this case) selling along with the other orders in his book.
For the most part, our traders won't be leaving any orders on the NYSE any longer because of the new "walking of the book" rule. The 50,000 share buyer (above) might do this: Buy 1,000 for 47.14, another 1,000 at 47.15, perhaps another 5,000 at 47.17 (partly from us in this example), and then buy more stock at $47.20, 47.30 or even $47.50....at each price level. This would take away any incentive for our traders to provide this liquidity, and cause for a worsening of price levels. I am advising our traders to go elsewhere with marketable limit orders. Since some ECN's pay for providing liquidity, it only makes sense to send our orders to one of them.
All that being said, when one door closes another usually opens. Some of my people are already writing (or modifying) their programs to enter trades only when a certain, rapid, price change takes effect. This would put them into trades at the ends of these more volatile price moves. The other benefit will be to our "Pairs traders" (see www.pairtrader.com) , who focus more on pre-determined price level entries, as opposed to obtaining price improvement when providing liquidity.
As in an earlier article (Survival of the Fittest, adapt or die - TASC January 2003), we will continue to modify our trading strategies as the market evolves. I am hoping to put together a more detailed analysis of the new NYSE changes after we have some trading time behind us.
And...
The floor broker, as agent for larger institutional orders that frequently trade in Rule 127 fashion (in which a sweep-price execution is still possible) will still be able to provide price-improvement opportunities to resting limit orders entered by liquidity providers.
An HBC e-mailed me that there are other electronic ways for liquidity providers to get price improvement:
⢠One is the Discretionary e-Quote, which is basically an electronic manifestation of what the brokers can do manually in the crowd. The Discretionary e-Quote is pending SEC approval; some background about it is in our Hybrid Training Program booklet, Chapter 25, here.
⢠The other is via the specialist's use of algorithmic messages, subject to certain restrictions. Our training booklet has a chapter about that as well, Chapter 15, here.
Don
