Commentary

Robert Schuessler
Traders Magazine Online News

A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

Traders Poll

In his first public speech, SEC Chair Jay Clayton deviated from his prepared remarks and offered his own "off the cuff" comments on market issues. Do you like this change of pace?




Free Site Registration

August 31, 1998

Hearing and GAO Report Opens SOES Wounds : Speakers Rap Continue SOES Bandits' Abuses of Automati

By Jeffrey L. Winograd

Also in this article

  • Hearing and GAO Report Opens SOES Wounds : Speakers Rap Continue SOES Bandits' Abuses of Automati

The Small Order Execution System is coming under renewed scrutiny for alleged abuses by SOES bandits masquerading as retail order-entry firms.

Lawmakers and an independent congressional agency, each weighing evidence of abuses on SOES, have rekindled the debate about the controversial system, raising the question of damages caused to individual investors.

A long-awaited General Accounting Office (GAO) report on SOES has recommended that plans for a revamped system include changes that wipe out potential trading advantages taken by SOES bandits.

Hearing

Separately, Rep. Michael Oxley (R-Ohio), chairman of the House Commerce Subcommittee on Finance and Hazardous Materials, held a hearing in early August on the impact and effectiveness of SOES.

The hearing sparked heated debate.

"[Day traders have] developed sophisticated systems that enabled them to exploit artificial and mandated-sized transactions in automatic executions, that took advantage of momentary price discrepancies among the competing market makers," John Tognino, president of the Security Traders Association, told the Oxley hearing.

On the contrary, responded James Lee, president of the Electronic Traders Association, the recent approval of the Actual-Size Rule by the Securities and Exchange Commission makes the continuing opposition to day-trading activities redundant.

"This single act has forever changed the SOES debate, and should lay to rest market-maker opposition [to SOES day trading]," Lee told the hearing.

Draft GAO Report

The GAO report recommends that any system designed to replace SOES should continue to provide an automatic-execution facility for small orders, while ending advantages currently held by day traders.

The report stresses that the National Association of Securities Dealers should back its proposal with adequate material on a planned time-delay feature designed to protect market makers. Finally, the SEC is encouraged to do a better job in guaranteeing "automated execution to provide for the fair treatment of all traders," the source said.

SOES enables order-entry firms and market makers to execute actual-sized orders on behalf of retail investors. Participants are able to lock in trades with designated clearance and settlement instructions, thereby providing an automated-execution system to public customers. But SOES is controversial, and has been blamed for abuses by firms picking off market makers' stale quotes.

The GAO put SOES under the microscope for the past ten months at the request of Rep. Charles Schumer (D-N.Y.), Rep. Gary Ackerman (D-N.Y.) and Rep. Sam Gejdenson (D-Conn.).

Microscope

The report noted the four objectives of the study: to determine the extent SOES is being used for its intended purpose; to explore the effects of SOES on the marketplace, volatility, liquidity and other issues; to evaluate the results of NASD rule changes intended to limit trading on SOES, or replace it entirely; and to appraise the effects of recent market developments on SOES, including taking a hard look at the NASD's proposal for a new order-execution and delivery system.

The report explains that the primary contributing factors for the recent reduction in the volume of SOES business on Nasdaq could include new market rules. It is generally accepted that the volume of SOES market share on Nasdaq has fallen to about seven percent of overall Nasdaq volume.

Oxley Hearing