Observations on the NYSE specialist.

[Hamlet]

Quote from dwl603:

again thx for the responses didnt think my such an innocent question would generate such a heated debate.

-Dan

Well remember (speaking of heat), it was Mrs. O' Leary's cow that caused the Great Chicago Fire. http://www.thechicagofire.com/

I look forward to those examples, and we will find out for sure if the other sellers are given priority over your shorts because they are long sellers. I believed that to be the case, as did several others here based on our real-world experiences, but some here have cast a bit of doubt on that so for now I'm willing to keep it open until some hard proof can be found since it's not much fun arguing back and forth too much.

 

[jimrockford]

Dan,


You will always increase your risk of non-execution if you use a limit order. Somebody can always step in front of your limit order with a newer, but more aggressively priced limit order sent to the specialist, or with a market order sent to the specialist, or with a floor broker bid or offer on parity with the specialist quote representing your order.

 

[jimrockford]

Quote from dwl603:


oh yeah one other thing, shouldnt these shares atleast be distributed equally?? see3ms like the little guy always gets the raw deal in these situation eg. 20,000 will print and I will only get like 2 I find it highly unlikely that 20 orders came at the exact same time. This in itself shows that there should be some changes made to the system.
-Dan

Dan, I think that if you are only getting a tiny fraction of the print, then this suggests that floor brokers on parity with you is not the explanation. I think it suggests that market orders and more aggressively priced limit orders are simply taking price priority over your limit orders. This is always a risk of using limit orders.

 

[CowboyBlue]

Quote from jimrockford:

Dan,


You will always increase your risk of non-execution if you use a limit order. Somebody can always step in front of your limit order with a newer, but more aggressively priced limit order sent to the specialist, or with a market order sent to the specialist, or with a floor broker bid or offer on parity with the specialist quote representing your order.

On Ford there is no issue of liquidity, thus no need for market orders, there is rarely more then a 1 cent spread between the bid/ask so why would I use a market order?? I try to get out at the offer price and if I cant then I usually hithave lots of shares to hit on the bid. I am moving size for pennies the stock only usually has an 8 cent range so every tick that I throw away is a large chunk of money down the tube with that one, I know about the market order/price priority on the thinly traded stocks it is useful.

 

[CowboyBlue]

Quote from jimrockford:

Dan, I think that if you are only getting a tiny fraction of the print, then this suggests that floor brokers on parity with you is not the explanation. I think it suggests that market orders and more aggressively priced limit orders are simply taking price priority over your limit orders. This is always a risk of using limit orders.

The bid/ask size on F is like 40,000 shares at any given time, why would he match a market sell order at the offer price unless it was going to go through the offer? this alone describes a major ineffeiciency in the specialist system.

 

[Hamlet]

Quote from dwl603:

The bid/ask size on F is like 40,000 shares at any given time, why would he match a market sell order at the offer price unless it was going to go through the offer? this alone describes a major ineffeiciency in the specialist system.

You are correct, a market sell will not likely at all be filled at the ask unless it is being cleaned up.

The same would go for a better limit since the spread is a penny... so what Rockford suggested would not be the case

 

[jimrockford]

Quote from dwl603:

The bid/ask size on F is like 40,000 shares at any given time, why would he match a market sell order at the offer price unless it was going to go through the offer? this alone describes a major ineffeiciency in the specialist system.

Suppose that the specialist has a bunch of buy orders and sell orders, which can be matched within a range of different prices, not just one price. Suppose he has some market buy orders, some market sell orders, and some limit buys at price 30.51, and some limit sells at price 30.46. This gives the specialist a 5-cent wide range of prices at which he can match these orders.

The specialist has a duty to maximize price stability. So if the specialist foresees more buying interest than selling interest in the very near future, then I think it might make sense for him to match market orders toward the upper part of the currently possible range, maybe even at the publicly displayed offer. Do you think so?

I don't think anybody has suggested any explanation that is consistent with your experience, other than the possibilities of either market sells taking priority over your limit sell, or lower priced limit sells taking priority over your limit sell.

 

[CowboyBlue]

Quote from jimrockford:

Suppose that the specialist has a bunch of buy orders and sell orders, which can be matched within a range of different prices, not just one price. Suppose he has some market buy orders, some market sell orders, and some limit buys at price 30.51, and some limit sells at price 30.46. This gives the specialist a 5-cent wide range of prices at which he can match these orders.

The specialist has a duty to maximize price stability. So if the specialist foresees more buying interest than selling interest in the very near future, then I think it might make sense for him to match market orders toward the upper part of the currently possible range, maybe even at the publicly displayed offer. Do you think so?

I don't think anybody has suggested any explanation that is consistent with your experience, other than the possibilities of either market sells taking priority over your limit sell, or lower priced limit sells taking priority over your limit sell.

Like I said on some of the more thinly traded stocks, this makes sense, and I do it, put ford up on your screen tomorrow I doubt you will see anything larger than a 1 cent spread more than 2 or 3 times in a day

 

[jimrockford]

Since the spread is only a penny, imagine what happens when the specialist has, all at the same time, some market buys and some market sells and some limit buys priced at the ask and some limit sells priced at the bid. He can match these orders at either the bid or the ask. He has to pick one. He can't go in between!

 

[jimrockford]

So of course market sell orders can execute at the offer, and market buy orders can execute at the bid, if the order flow imbalance points in that direction.