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Real Time Order Execution Class

06/29/00 12:04:55 <Threei> OK folks...

Let us start with reminder:  Stocks discussed are NOT recommendations for buy or sell. They are picked for discussing of execution technique and risk evaluation. 
Let's start with stock that was on many screens today so you will relate everything said easy: GMGC. 

What's the risk on this one, execution slippage wise?  (See IMAGE A) Spread is 1/32 (doesn't get any smaller). Plenty of market participants on each level. Gap between levels 1/32-1/16 - fairly tight. Sizes shown are good. Stock is SOESable for 1000 shares. All this spells low execution risk. BTW, that's how usually stocks with big float look. Often you can guess is float big or small from pure level 2 look. Since we touched this, stocks with small float tend to move faster and when they get active they make some nice movements, but usually they carry bigger execution risk. 

IMAGE A

Let's see how to get order done on GMGC.  If we want to buy it here (IMAGE B) and stock is quiet SOES would be OK since we have two MMs on the ask with sizes 3K and 1100.  Snet PREF to SBSH is OK too. If strong buying hits the stock and you want in right now forget 13/32 and take ISLD or ARCA at 7/16. 

IMAGE B

Now, when they gone (IMAGE C) BRUT is only option  via SNet PREF or ARCA  if you don't have BRUT direct. No SOES! BRUT is ECN, SOES won't work against it.  Let's pretend you sent SOES order at this moment. What happens next is: your SOES can't find any MM at the offer so it stays alive for 90 seconds so if one of MMs sees it and wants to fill it, he can get his quote down to 7/16 and give you a fill. If no one has volunteered in 90 seconds order times out. 

IMAGE C

ISLD joined the offer, (IMAGE D) so you can easy take it out. Notice: if you send order ISLD buy at 7 7/16 your actual fill would be at 7 111/256. You can see it on ISLD book. Level 2 doesn't reflect 256s, but ISLD book does, so actually you get price improvement. 

IMAGE D

If you want to sell it here, you can hit ARCA at 13/32 with 1000 shares sell order and if it has reserve order you get filled for 500 plus amount of shares ARCA has in reserve, up to full amount of your sell order. If it doesn't, you get your 500 sell and remaining 500 is to be sold at 3/8. Actually, what I would do: considering strength of 3/8 bid, I would not be in a hurry to sell the rest of shares and would just wait a little to see if new higher bid pops up keeping sell at 3/8 ready. Just keep in mind that different brokers have different commissions schedule and you need to know how it works in your particular case in order to not get hit by commissions for amount bigger than you saved on better price. 

To sell the rest of shares at 3/8: (IMAGE E) just hit ISLD which shows gathered bid for total 1200 shares. ARCA sell is OK too, since there are enough ECNs at the bid (ISLD, INCA, BRUT). Other options:  SNet PREF to HRZG or GSCO. and SOES.  Why I named HRZG and GSCO? HRZG, because they have nice size. GSCO shows enough size but there is one more reason for me to pick it: It's solid MM that fairly seldom avoids fulfilling his obligations if at all and in fact when I see several MMs with the same sizes at the price I want and one of them is GSCO, I will prefer them and my chance to get a fill is higher even on fast stock. OK, seems it's pretty much it about this one. Overall stock is fairly easy to get your order done. 

IMAGE E

The next one won't be that pretty: LGND (IMAGE F). Let's evaluate risk on this one. Spread is tight,  just 1/16. Gaps are not as tight but look OK still. Not too many market participants at each level. Sizes shown are not as great, and if you watched this one earlier when it was hot you could see spread changing up to 3/8 and stock moving almost hysterically on small prints like 200-300 shares could move it by 1/4. Risk is not as low here as with GMGC. I would say, if you play 1000 shares and things get nasty on you, you can count on losing 1/2 fairly easy. 

IMAGE F

Let's see how to route the order on LGND. If you want to buy it here (IMAGE G): just 300 shares on BTRD ECN, just 100 shares shown by NITE. If you want 1000 at 5/16, all you could do: SNET PREF to NITE for 1000, All Or Nothing (AON). If you are more flexible in strategy chosen for this stock and don't mind to pay a little higher and/or have several partials you can do following: SNet PREF to NITE for 1000 shares, ANY.  If he fills 100 shares and leaves to ask, you hit BTRD for remaining 900 and if it doesn't have reserve you get 300 more. Then if no one gets down to 5/16 ask for 10 seconds you send 600 shares buy to MLCO at 3/8 with good chance to get filled for entire 600 order, since MLCO is big boy and often won't mind to give you more than he shows. If all he gave you is 100 shares... oh well, you have 500 now, which is tradable lot and further events will show you to add more or to trade 500 shares. 

IMAGE G


It doesn't sound like pretty way to trade but you cannot do anything to get shares if they are just not available at your price. If you want in badly and suspect buyers will hit stock hard you might just pay 1/8 more and send SNet PREF to HRZG at 7/16 for 1000 shares.  To sell it, if stock is quiet: SOES sell, entire 1000 will go to MASH at 1/4. Not anymore... (IMAGE H) Now after down tick, you can see how not easy it could be to trade this one.  Just no decent sizes anywhere in sight. SOES is useless, no ECNs, all you can do is to try to hit MMs with your order and hope for them to buy more than they show.  Remember, we stated at the beginning that if things get nasty on this stock you can lose 1/2 easy? Now you can see it from how level 2 looks.  Assuming no one supports the stock for more than they show, you sell 100 shares at 3/16, 100 at 1/16, 200 at 13, 200 at 7/8 etc, and this is possible only if you are the ONLY seller at the moment!  Just imagine how it trades if real selling pressure hits it...  

IMAGE H

On stocks like this timing is extremely important and if you got nice entry point and momentum drives stock in your favor you would have to sell into strength risking to miss part of the move but protecting your profits from turning into loss. Old rule: Sell when you can, not when you have to. Of course all this applies to fast daytrading stuff. If you take it as swingtrade  your stops would wider and entry/exit point wouldn't have to be that precious. 

<Threei> OK, let's take questions now, since I have to leave for long weekend camping fairly soon :) 
<Yank> Is there a group of MMs that you prefer to deal with on a regular basis? 
<Threei> Quite interesting question Yank.  First of all, I pay attention to sizes and of course I prefer to deal with MM that shows bigger amount of shares. If they all are roughly equal it's important to understand who of them is who.

Let's say, there are 3 groups of MMs.  
1. Retailers: NITE, MASH, HRZG are the most noticeable ones.  They deal with individual traders mostly, representing their orders, trading against them, etc. They rarely act as Axes since they seldom represent big institutionals. 
2. Wholesalers: GSCO, MSCO, MLCO for example. Those is in big league. They rarely fool around and if you see one of them on the ask with 100 shares your chance to get filled for 1000 is high.  With retailers, it's random.  In fact, it's not often that you could see GSCO showing 100 shares. 
3 group:  plenty of "no name" Mms that hunt and peck here and there and their actions don't have any recognizable pattern. 

Who to deal with... well, there is no set of hard rules,  but understanding of who they are helps to pick your way with some experience. 

<orlean> What do you consider big float/small float? 
<Threei> Well... let's say  stock with float 2-10 millions has pretty small float,  10-15 - rather small but it moves more stable,  15-25 - normal, average,  25-35 is rather big,  over that is very big up to huge, like NOVL for instance,  but here is the catch:  any stock, even NOVL or PMTC with huge floats could get real hot and tough to execute. So, actually there is one more factor to consider:  turnover. Of course, it's easier for stock with small float to turn entire amount of it in 1 day if it gets real hot and this is why it jumps like crazy antelope. Just not enough supply to satisfy hit demand or not enough demand to absorb big selling. 
 
<kevin11> Was SOES preferable to the SNET Pref in the GMGC example, and why. Also, in what circumstances, if any, is SOES clearly the best route. 
<Threei> It depends on the way stock trades, and general rule is: The hotter stock is the more useless SOES is. Problem with SOES is queue which means: MM has to fill SOES orders every 17 seconds, so, if he has 5K shares to sell and you are 6th in the line you won't get a fill.  And if you are 5th in the line you will get a fill ONLY if he doesn't have any SNet orders SOES is auto system and it makes fills instant IF your timing is perfect. On top of that, SOES hits MM for the amount shown so if he shows 100 shares and you try to SOES him for 1000 - you are guaranteed to get partial. All these limitations almost killed SOES as execution route comparing to what it was several years ago. Now it's good for slow stocks only. 

<David> Threei, do the wholesalers (GSCO, MSCO, MLCO...) fool around much in the pre-market? 
<Threei> Not in a sense we got used to see with NITE, like: showing higher bid with no obligation and selling all he can to all the buyers inspired by his high bid. Of course there are some plays but overall they act way more solid. 

<Foggybottom> When there are no ecns so you send order to mms how would you do that?
<Threei> It's usually SNet PREF. 

<jigfish> I have been told that you don't want to make a habit of going against GSCO.....low percentage on success....true or false 
<Threei> ummm... This is entirely different topic...  axing the stock, playing with ax... Let me phrase it this way: If you got to understand what certain MM is doing with particular stock, watching him for awhile. It gives you some edge but it's never simple, never just watch him switching from bid to ask, since he wants to hide his real intention and usually he is very good at it.  I wouldn't put it that simple: don't go against GSCO...  GSCO often just makes market in stock like many others, and yes, sometimes they are axing the stock and God save to appear on opposite side, but it could be said about any ax if he has real big order to fill. 

<michaelj> Is LEHM with MSCO, MLCO, GSCO as big boys wholesalers? 
<Threei> I believe so, Lehman brothers is not small fish :) 

<mildog> 3i, what other avenues can mm's use to transact/hide themselves: INCA, BTRD? BRUT? 
<Threei> Any, SNET, phone call, ecn, not soes though. SOES is no no for pros. 

<bbcc> heard a while back that market makers would have to honor their prices within 5 minutes of market open. Is this true or will it be in the future? 
<Threei> It's trade or move rule... It says:  10 min prior open, if MM wishes to lock/cross market, he has to enter order not less than 5K shares and has obligations to honor it. Others have to fill it or move their quotes so that market would get unlocked.  It's in effect already but I don't see it working :) 


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