Observations on the NYSE specialist.

[Hamlet]

Quote from jimrockford:

Here is another expert who states that NYSE allows floor brokers to override price-time priority. He is Marshall E. Blume, Howard Butcher III Professor of Financial Management at the Wharton School of the University of Pennsylvania, in his comments to the SEC at http://www.sec.gov/rules/sro/ny9948/blume1.htm

Sorry Rockford, you are still Wrong


As I pointed out pages ago, your response to Dan, who wondered why his order on the book was not filled while another larger order that came to the book after his was filled.

Here was your response to Dan:

Quote from jimrockford:


NYSE rules sometimes give priority to a larger size order, over a smaller size order at the same price, even though the smaller size order arrived first. I suspect this is what happened to Dan (dwl603).

I pointed out that this was wrong then, and it is still wrong now. It seems that you are going through an awful lot of trouble in attempt to make it right (how many hours did you spend searching to dig all that stuff up?), but it is still wrong. I commend your effort though.

Remember, as your friend professor Blume said, "NYSE does preserve strict price-time priority within the limit-order queue"

 

[jimrockford]

Quote from cstu:

Jim

Have been gone today but your last snippet is pretty good and telling. It really is not worth my time to try to expalin somewhat arcane rules to those that don't want to listen. I think you have a handle on the long/short debate.

***

We are covering a lot here and I would be happy to handle any questions in private IM or here if we can have a respectful conversation.

cstu,

I absolutely respect and appreciate your contributions on this and other threads. I particularly appreciate your confirming that I was correct about the long/short debate, and also correct that the NYSE book is time-price priority but not the NYSE trading crowd auction which includes the NYSE book. If your answers had gone the other way, I still would have appreciated your giving us your expertise. I think we are all very fortunate to have a former specialist, not only posting to clarify our questions and debates, but also doing it in a sincere and revealing way. I know we don't agree about everything, but this is no reason for either of us to be disrespectful toward the other, and I'm quite sure that no disrespect has passed between us.

I was very concerned that we would lose the benefit of your participation, because of the atrocious unrestrained behaviour which continues in this thread. If this gets to be a problem for you, or if for any other reason, you prefer to communicate by PM, then I'm all for it, but if possible, I think public discussion is better, because then we all help to educate each other. I have learned a great deal from the collective process of this thread, from many different people, and especially you. Thanks!

 

[jimrockford]

Quote from Hamlet:

Sorry Rockford, you are still Wrong


As I pointed out pages ago, your response to Dan, who wondered why his order on the book was not filled while another larger order that came to the book after his was filled.

Here was your response to Dan:



I pointed out that this was wrong then, and it is still wrong now. It seems that you are going through an awful lot of trouble in attempt to make it right (how many hours did you spend searching to dig all that stuff up?), but it is still wrong. I commend your effort though.

Remember, as your friend professor Blume said, "NYSE does preserve strict price-time priority within the limit-order queue"

One more time, Hamlet.

The NYSE book is price-time priority. An order which arrives later, at the book, cannot jump ahead of an older order booked at the same price. The NYSE book, however, is only one part of the NYSE trading crowd auction. The trading crowd auction is not price-time priority. It is instead governed by the far more complex NYSE Rule 72, which sometimes allows floor brokers, represented in the auction but not in the book, to jump ahead of older booked orders at the same price.

It was impossible for any order, arriving later in the book at the same price, to jump ahead of Dan's sell order. Long/short has nothing to do with it. The only selling interest which could have jumped ahead of Dan's short sell order would have been newer floor broker offers at the same price. The selling interest, which Dan saw on the book behind him, was not the selling interest which jumped ahead of him.

I respect and appreciate rubberbird's opinion that long sells take priority over short sells, but I find our former specialist's opposite viewpoint to be more convincing. I would ask anyone who believes that long sells take priority to cite the exact NYSE rule which proves your claim. If you can't cite the NYSE rule, then this if further evidence that long sells do not take priority over short sells.

 

[cstu]

Jim

I am not sure if my comments will actually help anyone in their trading but they should serve to lesson the blood pressure on occasion when people here think they are being ripped off.

"the ony selling interest which could have jumped ahead of Dan's short sell order would have been a newer floor brokers offers at the same price"

Not entirely correct. As I try to expalin, and I admit the rules are rather arcane, this order can "large order" can never jump ahead on the specialist book. Also the best the larger order can do is trade on parity (after parity is acheived) by virtue of a match.

The only way this order can ever sell more than the specialist book or any other broker on parity is if the seller gets there own buy order that is greater than the total of all other offers. He can then cross his stock and shutout everyone.

 

[cstu]

Jim

I am not sure if my comments will actually help anyone in their trading but they should serve to lesson the blood pressure on occasion when people here think they are being ripped off.

"the ony selling interest which could have jumped ahead of Dan's short sell order would have been a newer floor brokers offers at the same price"

Not entirely correct. As I try to expalin, and I admit the rules are rather arcane, this order can "large order" can never jump ahead on the specialist book. Also the best the larger order can do is trade on parity (after parity is acheived) by virtue of a match.

The only way this order can ever sell more than the specialist book or any other broker on parity is if the seller gets there own buy order that is greater than the total of all other offers. He can then cross his stock and shutout everyone.

 

[cstu]

The good professor Blume is not wrong in a lot of what he says but his conclusion are nuts for the market.

Does anyone want to think over what he is saying on NH orders? I guess he thinks a not held order entered through a computer using an algorithm is ok but one using a human floor broker is not ok. Of course this might fit in well with his justification for payment for order flow and sending orders to MADOFF.

The best market structure work out there is from Robert Schwartz at Baruch. He used to be at NYU.

 

[jimrockford]

Quote from cstu:

Jim

I am not sure if my comments will actually help anyone in their trading but they should serve to lesson the blood pressure on occasion when people here think they are being ripped off.

"the ony selling interest which could have jumped ahead of Dan's short sell order would have been a newer floor brokers offers at the same price"

Not entirely correct. As I try to expalin, and I admit the rules are rather arcane, this order can "large order" can never jump ahead on the specialist book. Also the best the larger order can do is trade on parity (after parity is acheived) by virtue of a match.

The only way this order can ever sell more than the specialist book or any other broker on parity is if the seller gets there own buy order that is greater than the total of all other offers. He can then cross his stock and shutout everyone.

cstu,

Thank you for keeping it coming.

I'm a bit confused, so I hope you can clarify. I believe that my words, which you quoted, are consistent with what you are saying, so I don't understand how they can be incorrect. If I understand you, orders on the book cannot jump ahead of other orders on the book, but floor trader bids and offers, without ever reaching the book, can jump ahead of the book. Are we in agreement on this?

I think you are saying that in order to jump ahead, the floor broker would need to win a "match". I believe that most of your audience, here, does not know the meaning of that word, "match". I think you are probably using a lot of lingo that your audience here does not understand. I think that if you can explain terminology and dumb it down a little, you will be even more helpful to even more people.

 

[aPismoClam]

NYSE -- the exchange of yesterday!

 

[jimrockford]

cstu,

I just wanted to add that even if you don't have time to take my suggestion to dumb things down and to explain terminology so that all readers can understand, your explanations and higher-level commentary are still highly beneficial to very many people and I do hope you will keep them coming.

If you don't have time to dumb things down, then perhaps I will do a little dumbing down for you, by explaining some aspects of your postings for people who don't know about things like matches, the NYSE auction outside of the specialist book, etc.

 

[cstu]

Sorry Jim, it really isn't that complicated but I know if I don't try to explain every rule that pops up once a millenium, someone will jump in questioning my background, knowledge, and integity.

In a nutshell, and throwing out the exceptions which are very infrequent:

1. long and shorts on the NYSE book adhere to strict time priority.

2. The specialist is considered one trading entity representing the many varied orders on his book at specific prices and after they are filled at the specific price level he can represent himself.

3. Each broker in the crowd can be considered one trading entity.

4. Each trading entity at a specific price is entitled to a "match". 2000 shares trade at the offer four brokers sell 500 shares each(the specialist and three floor brokers).

5. The only way we need to think about the "size" rule is if one of the floor brokers or someone new gets a buyer that will buy stock on the offer in a sum total which is greater than all the other offers in the crowd and on the book. The only seller that may be entitled to sell this stock is a seller that can sell the whole buy order themselves and their sell order needs to be larger than the sum of the other brokers including the specialist to block the "matching"

Also, in order to "size" one broker or multiple brokers it is necessary for one specific broker to have both sides of the trade (the buyer and seller)


Since it is an auction market the broker that is going to attempt a cross sizing the book on the offer must first "bid" for the stock.

For instance, let us say the market is bid 29.95 for 50M shares all on the specialists book. and the offer is 200M shares at 30 which is the specialist offering 5M and MER offering 5M and MS offering 190M.

Any stock that trades at 30, on the offer must be split three ways. However if MS and only MS gets a buy order willing to pay 30 for a sum greater than 10M, they are entitled to cross the stock and shut out the other two brokers. If the buyer is anyone else but MS there is no way to shut out any broker at 30. Unless a buyer comes in willing to pay 30 with there own 30 seller that is greater than 200M.

The way this would be done is the buyer will bid 29.99 for 201M. this gives all sellers who have verbalized offers or who are in the crowd the oppurtunity to sell 201M at 29.99. This is price improvement. once they don't hit a bid at 29.99, they are taking the chance that the buyer has his own seller and then will cross the 201M at 30 shutting everyone out.

This is all based on everyone being on parity, but it would best serve the purposes here to have parity be a given in all circumstance.