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July 1, 2010

This Year's Model

By Michael Scotti

Limit orders just sitting there, going unexecuted. It's the same old story. It happened during the heyday of the Nasdaq dealer market. It happened on the floor of the fabled New York Stock Exchange, during the auction process. And it's still happening in today's sophisticated, hyper-speed market. The time, place and methods of trading may change, but the results are the same.

Michael Scotti, Editorial Director

You can read about the latest rendition of this issue in this month's story, "Some Traders Would Welcome a Trade-At Rule." The piece chronicles a prop trader who's practically given up on posting limit orders because he can't get filled. And he's upset. Trades away from his order execute off-board in subpennies-right up to his limit. He now trades only one side of the market--the take--and consequently, executes about half as much as he used to. That is crimping his profitability. The SEC discusses the issue of "trade-at" in its recent Concept Release. Of course, the SEC would like to push more limit orders into the public market. That's something the SEC's landmark Reg NMS was supposed to accomplish, but did not. I think you'll find the reporting by John D'Antona of great interest.

Separately, there's been a huge shift in the options business. This month's cover, "Reversal of Fortune," focuses on the options exchange fees and who is paying them. Customers are now bearing a larger portion of these since the introduction of penny pricing and the subsequent move to maker-taker pricing. Peter Chapman's story takes a look at this evolution. And it is significant, he reports, as customers no longer trade for free.

"In the past, market makers were making enough money so they could afford to bear the costs," said Slade Winchester, a director in Citigroup's U.S. equity derivatives division. "But markets have tightened up to a level where market makers can't continue to bear the cost and make tight markets. So the costs are shifting." The good news is that spreads have narrowed as a result of penny pricing, so although customers might be shouldering a greater burden of the fees, they are also seeing a savings from the tighter spreads.

As I write this, half the year is nearly gone. There is still economic uncertainty from Europe. And many questions remain for the trading industry. Will commissions pick up in the second half? What will the SEC do regarding future rule-making for dark pools, high-frequency trading and other areas? At Traders Magazine, we plan to be there every step of the way, doing our best to keep you up to date on the developments coming from Washington, D.C. and on Wall Street in the trading community. We look forward to meeting that challenge.


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