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Excerpted from TheStreet.Com article 7/14/00
Nasdaq's New Trading System Won't Show and Tell All
WASHINGTON -- You might have thought that the overhaul of the Nasdaq's
computer-based trading system would provide an opportunity to make the
system more transparent -- long a stated goal of regulators, who say they
want the public to get as much information on pricing and volume as
possible. That was certainly one thing Nasdaq tried to accomplish with the
design of the new SuperMontage.
SuperMontage is designed to display the three best levels of pricing and
volumes associated with each, thus providing a richer view of the overall
supply of, and demand for, a given stock. Regulators and others favor this
process of "opening up the order book," which can provide valuable help to
buyers or sellers trying to judge where a stock might move.
But that benefit could be undermined by another SuperMontage feature,
called "reserve," which would let market makers advertise a stated amount
of shares they're willing to trade, when, in fact, they're sitting on a
much greater volume that they'd like to move.
For example, suppose a market maker has an institutional client wanting to
trade 50,000 shares. Dumped on the market all at once, such a block could
depress the price. (Likewise, a big buy order could bump prices up.)
To avoid that in Nasdaq's new system, the market maker might post a quote
offering to sell, say, only 2,000 shares at a certain price. The remaining
48,000 shares would go into a hidden reserve, which essentially carries an
electronic note that says, "By the way, buyers, if you want more than the
2,000 shares I've posted at that price, I'd be happy to give you more."
Thus, even though those 48,000 shares make up the bulk of the order,
SuperMontage won't show their availability to the overall market. All the
market will see is the 2,000-share quote, which becomes, in essence, a work
of fiction. A buyer might snatch up the first 2,000 shares, and then all or
part of the reserve, without the broad market ever knowing the reserve
shares were there.
The result? Whether one were a would-be buyer or seller, anyone thinking
they've scoped out the trading picture for the stock would have a fuzzy
view at best, and that could cost them money.
The reserve feature is available for blocks of at least 1,000 shares,
meaning institutions will be the primary beneficiary.
Another SuperMontage feature will allow market makers to post price and
volume quotes anonymously, which also can deprive market participants of
useful information.
For example, it's common on Wall Street that certain market makers become
the dominant traders of certain stocks, and that other players watch their
moves carefully as a result. In Wall Street parlance, they become the "ax"
for a stock.
So if quotes go up on the Nasdaq system showing that an "ax" wants to move
shares in a stock it "owns," that can be a valuable clue that something's up
http://www.thestreet.com/markets/marketfeatures/999507.html
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