SPY vrs ES (sub penny) Question

[chartman]

<b>Priority (time), Parity (ability to fulfill), and Precedence (size).</b>

Order placement would be as follows:
If there were three traders with the following orders on the book; Trader A has 300 shares to sell and he has time priority, Trader B has 500 shares for sale and trader C has 1000 shares for sale. A contra order to buy comes for 100 shares. A gets the fill since he had time priority and the ability to fill the order. Now there is no time priority since an order has been fulfilled. Another contra order comes for 300 shares. Trader A is out of the queue since he does not have parity with only 200 shares to sell. Trader B has the ability to fulfill the order but so does Trader C. Back when I was trading, all brokers carried what they called a 'lucky' coin. The two brokers would flip the coin. This was called "matched and lost" and reported to the customer if your broker lost the match. Lets say Trader B's broker won the match and he sold 300 shares. Now we have Trader A with 200 shares, Trader B with 200 shares and Trader C still with 1000 shares to sell. Now another contra order comes in for 200 shares. Trader C will get a fill on this order since all three have the ability to fulfill and none of them have time priority but Trader C has precedence with size. This was the method used on the floor. Now with electronic trading, of course brokers cannot toss a coin. I have watched orders being filled out of the queue and only time and precedence appears to be used and size determines fulfillment.

It is not unusal for markets not to inform the public of order fulfillment procedure. If anyone can obtain the current method of order fulfillment on the electronic markets, please share it with us. To be fair, in my opinion, orders should be filled strictly on time priority. But I have tested the market and watched the screens enough to know it's not.

One good thing about the electronic market, limit orders cannot by passed on a fast market without an execution. On the floor, a specialist could bypass orders on the book without cleaning up the book with the approval of a floor governor.

 

[abattia]

chartman,

Can't argue with what you've actually seen ... even if it seems things ain't supposed to be that way now!

Quote from chartman:
... If anyone can obtain the current method of order fulfillment on the electronic markets, please share it with us...

It's all there on the NYSE site (which - although it is not clear from the website - probably also includes rules for AMEX, too). www.nyse.com Search for rules 72, 104, and 108. Can't find the same for NASDAQ, and haven't spent the time looking for it for DirectEdge (EDGA/EDGX).

 

[abattia]

Quote from chartman:
... Now there is no time priority since an order has been fulfilled...Trader A is out of the queue since he does not have parity with only 200 shares to sell...

Again, these don't resonate with what I believed I understood;

a) For NYSE at least, I'm still under the impression that a sort of "FIFO" (First In First Out) operates until no further trades can be cleared at that price. i.e. a single trade at that price does not re-set the time priority ranking of all orders. The ranking will "survive" the first trade.

b) It doesn't matter that Trader A only has 200 shares. Her 200 shares will get executed if they are next in the queue, and then 100 shares from whoever is next. Even a specialist can't step in front of Trader A's public order unless the specialist improves on the price.

I hope someone will correct me if the above are wrong ... Of course I accept that there may be large "disconnects" between what should happen and what actually does!

 

[jd7419]

Quote from jones247:

Which would have less slippage during RTH:
a) 50,000 share order of SPY
b) 100 contracts order of ES

thanks,

Walter

100 es 100% of the time. If you calculate the dollar volume of both of these markets during rth you can see the size of the es vs the spy. Now 50,000 share of spy would not be hard to execute either I just wouldn't, if i wanted a pos that big I would use the es.

 

[pookie]

Quote from abattia:

From Rule 72 ...
The term "displayed interest" includes that part of an order that is published as, or as part of, the Exchange BBO.

and

Only the portion of setting interest that is or has been published in the Exchange BBO shall be entitled to priority allocation of an execution. That portion of setting interest that is designated as reserve interest and therefore not displayed at the Exchange BBO (or not displayable if it becomes the Exchange BBO) is not eligible for priority allocation of an execution irrespective of the price of such reserve interest or the time it is accepted into Exchange systems.

http://www.nyse.com/Frameset.html?displayPage=http://rules.nyse.com/NYSE/Help/Map/rules-sys77.html

[makes good bedtime reading]

heh heh...i think i've found the cure for my insomnia.

thanks for posting the info.

 

[jones247]

thanks... however, aren't they pretty much equivalent on a notational basis?

Quote from jd7419:

100 es 100% of the time. If you calculate the dollar volume of both of these markets during rth you can see the size of the es vs the spy. Now 50,000 share of spy would not be hard to execute either I just wouldn't, if i wanted a pos that big I would use the es.

 

[propseeker]

um, just to let everyone know. chartman has been filling your heads with absolute garbage since the first page. he is one of the more coherent yet absolutely clueless people i've had the privelege to read here on ET.

to clarify, electronic markets for us equities are price->time, PERIOD. the ONLY exception is if your order is not displayed (iceberg, hidden).

i make markets electronically for a living and i push a non-trivial amount of volume. i'd be out of business if this fabled 'precedence' existed... and if you think about it for more than a few seconds you'd realize, the entire hft industry would be out of business too. latency kind of becomes moot if you can slam the book with size to get priority, now doesn't it?

 

[abattia]

chartman,
Do you have a final statement before the judges reach a verdict and pass sentence?

The charges:
1. Spreading misinformation on ET
2. Asserting falsehoods, albeit unknowingly and eloquently

 

[chartman]

Quote from abattia:

chartman,
Do you have a final statement before the judges reach a verdict and pass sentence?

The charges:
1. Spreading misinformation on ET
2. Asserting falsehoods, albeit unknowingly and eloquently

The information I have presented concerning order placement was on the floor of an exchange. Whether one believes it or not has nothing to do with it being factual. My statement was if someone knew for certain the method of order fulfillment on electronic markets to share that information with us. For someone who has never heard of precedence, I am not sure his opinion of how the market operates would be reliable. He may be clueless as of the reality of the matter.

I worked in the financial industry for over twenty years. I started in 1969 being registered as a CTA, CPO and AP with the USDA before CFTC became a regulatory agency. I became a RR in securities in 1973. I retired in 1990. I think I have an understanding of the investment markets.

I took the New York Institute of Finance course in 1973 to become registered as a RR. They are probably one of the best schools for educating people to enter the investment business. Their textbook <i>Work of the Securities Industry</i> was written by Allan H. Pessin who at that time was an employee of Salomon Brothers a major firm on Wall Street. He had the advice and assistance of numerous individuals with actual working experience on Wall Street including Simon Krauthamer, who at that time was the Assistant Floor Director of the New York Exchange. The text outlined priority, parity and precedence. It was and probably, without doubt, is still the procedure for order placement. I am no longer actively involved and things may have changed but I doubt it unless competition has forced modifications. As one can probably guess, I am older now and my memory may not be as functional as it once was but I believe my interpretation of order fulfillment on an exchange floor is correct. It would not upset me if I am proven wrong. It would not be the first mistake I have made and probably will not be the last.

In the early 1980's there was an effort to start a new electronic commodity futures exchange. It was known as the International Futures Exchange or INTEX. I purchased a membership because I thought this would be the wave of the future for all investments. It was started by people in the academic world with limit knowledge of the financial business. But the primary reason for failure was all of the professionals would not support it due to the order placement being strictly priority based on time of entry. All of the major exchanges said electronic trading would not be successful. LIFFE was started at about the same as a traditional floor exchange and the professionals supported that endeavor. My point being, from my experience in the business, the professionals normally will need an edge over the investing public to be involved. The question then is: What is their advantage on the current electronic markets? There has to be something. They sure do not like a level playing field.

 

[abattia]

chartman
Thanks, for the full and detailed response.

I only have a small fraction of your experience in terms of years in the industry, and real experience such as yours is something I respect in all fields.

In fairness, I don't think it is a matter of bicep flexing to prove one person right and the other wrong; rather it is about getting to the bottom of the question at hand, as the answer effects how one should trade to be successful today in the current market.

And I can well understand matters were likely handled differently in the past (and I apologise for my last post, which was meant to be funny, but instead almost certainly appeared churlish and unnecessary).

I have contacted NYSE/AMEX, and they have agreed to research the following question:
Q. What are the rules determining order matching on NYSE and AMEX? Do larger orders get filled before smaller ones? i.e. do “insiders” get filled before retail traders?
I’ll post their answer as soon as I have it.

For my part, my initial reaction to your assertions was influenced by my reading of the following book: Trading & Exchanges (Market Microstructure for Practitioners), by Larry Harris, published in 2003 by Oxford University Press. At the time the book was published, Harris was apparently Chief Economist of the US Securities and Exchange Commission, and an “expert in market microstructure”. I have no idea whether he is still either of these ... but I can't recommend his book enough.