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SOES is short for Small Order Execution System. A system devised by NASD
after 1987 because small investors had trouble getting fills or even
getting thru to brokers during the October decline.
In the beginning, SOES was designed as an electronic method to
automatically hit the best bid or take the best offer for up to 1,000
shares using a NASDAQ Level 3 system.
Opportunists, if you will, jumped on the system as a method for making
money, primarily in the following fashion. If, for example, there are 20
MMs on the box for a given stock abd say there is 7 at the best bid and
7 at the best offer the market is net nuetral from the viewpoint of the
SOES trader. As MMs start to move off the bid (or the offer) A SOES
trader prepares to take stock (or short stock) anticipating a short-term
move.
Over time, traders would get accustomed to which MM(s) drive the stock.
That is to say, if Goldman (for example) were to still be on the offer
in the above example after the other 6 MMs left, well if Goldman drives
the stock it may not be wise to presume the motion would occur.
Anyway, People started opening bucket-type shops to entice traders to
trade SOES with the promise of low commissions and theoretical high
gains. ....After all, if you SOES 1000 shares 4 times a day for 0.25
each time you make $1,000 each day less commissions.
A general outcry by MMs, warranted or not, persuaded the NASD to drop
the maximum number of shares to 500....making the viability of such
trading far more difficult. Not that it was as simple as the SOES
managers tried to lead traders into believing in the first place.
This is a thumbnail sketch but I have to run out. This is the general
idea, however.
--PJS
GwGautier wrote:
>
> A stupid question to start the year: What does "SOES trader" mean?
>
> Thanks for any plain english response...
>
> Gwenn
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