The Small-Order Execution System (SOES) was a system to facilitate clearing trades of low volume on
Nasdaq
The Nasdaq Stock Market (; National Association of Securities Dealers Automated Quotations) is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list ...
. It has been phased out and is no longer necessary.
History
SOES was first introduced in December 1984 for 25 stocks
to provide automatic order execution for individual traders with orders less than or equal to 1000 shares. The lack of
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...
after the
1987 market crash led Nasdaq to enforce mandatory use of the SOES by all market makers using the NASDAQ National Market System,
providing excellent liquidity for smaller investors and traders.
Initially, when SOES was mandatory, it was met with heavy pessimism from Nasdaq member firms because it forced them to execute all SOES trades that met the market maker's advertised price. There were also significant limitations implemented to prevent
day trader
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day. This means that that all positions are closed before the market closes for the trading day to avoid unmanag ...
s from exploiting the system and taking advantage of old prices quoted by market makers.
SOES operated alongside another electronic system called SelectNet, launched in 1988, which enabled market participants to negotiate via computer instead of
telephone
A telephone, colloquially referred to as a phone, is a telecommunications device that enables two or more users to conduct a conversation when they are too far apart to be easily heard directly. A telephone converts sound, typically and most ...
and permitted larger orders than SOES.
Although SOES was intended for use by
retail investors, by 1995 more than 80% of its users were day traders, who used the system because its automatic execution gave them a trading advantage,
although licensed broker-dealers were prohibited by Nasdaq rules from using SOES to trade for themselves.
Since much trading on Nasdaq was still done by human
market makers
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the difference, which is called the '' bid–ask spread'' or ''turn.'' Th ...
, day traders (derisively nicknamed "SOES bandits") could exploit slower human reaction times to profit from
scalping
Scalping is the act of cutting or tearing a part of the human scalp, with hair attached, from the head, and generally occurred in warfare with the scalp being a trophy. Scalp-taking is considered part of the broader cultural practice of the taki ...
outdated price quotes when the price for a stock shifted.
SOES's share of total Nasdaq trading volume was 5% in 1998.
In July 2001, Nasdaq rolled out an upgrade to SOES, dubbed "SuperSOES", that raised the cap on trades in a single transaction from 999 to 999,999.
Rules
There were several restrictions for those who used SOES, rather than a traditional
electronic communication network
An electronic communication network (ECN) is a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges. An ECN is generally an electronic system accessed by an electronic trad ...
(ECN), to place their orders.
* Trades could not be in excess of 1000 shares for a particular stock.
* SOES did not allow trades in stocks that were trading at prices greater than $250 per share.
* Once a trader received an execution through SOES, they had to wait 10 minutes to place a trade on the same side of the market in the same stock.
* Institutions and
stockbroker
A stockbroker is an individual or company that buys and sells stocks and other investments for a financial market participant in return for a commission, markup, or fee. In most countries they are regulated as a broker or broker-dealer and ...
s were not allowed to place orders for their own accounts through SOES, but they could for a client's account.
* Market makers had to honor their advertised
bid/
ask price
Ask price (also called offer price, offer, selling price, asking price, or simply ask) is the price a seller states they will accept.
The seller may qualify the stated asking price as firm or negotiable. Firm means the seller is implying that th ...
s to SOES orders, provided that they were for the amount that the market maker was seeking.
Effect
SOES revamped the trading market for individual investors. It gave small investors and traders the opportunity to compete on a level playing field with larger investors, such as institutions, for access to orders and execution.
See also
*
Advanced Computerized Execution System
References
External links
Trading Opportunities
Share trading
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