Thanks for the excellent link to the Nasdaq Trader web site presentation reviewing the new SOES / SNET changes which will take effect on 6/5/00. Note that they are referring to this new system as SuperSOES.
I highly recommend to any active trader using a direct access broker to take some time to watch this ~25 minute slideshow presentation (http://customer.nextvenue.com/nasdaq/realmain100.htm) and read the question and answer section(http://www.nasdaqtrader.com/trader/news/webcast/qasoes.pdf). It is very informative and clearly presented.
From what I saw, I think the new system will be a great improvement for traders using Nasdaq. I'll list some of the key points that seemed important to me:
1) The new system will virtually eliminate the need for the SNET system by allowing SOES orders to be placed by all market participants for sizes up to 9900 shares. Note that the 5 minute SOES rule will be eliminated, so that large traders can, for example, place 5 consecutive SOES orders for 9000 shares in order to buy 45,000 shares.
2) ECN's will have the option of being included as an "auto execution" ECN and therefore being SOES'able, or declining to participate in this new SuperSOES system and only being accessible through SNET (as currently the case). This, I believe, is the biggest unknown for the new system. If the ECN's decide to participate, then this system will be as close to a 'fair' system as I could ever imagine we'd see. I am pretty excited by this prospect.
3) SNET will become a non-obligatory system for accessing market makers, and can only be used to preference them for a size in excess of their quoted shares. In other words, if the market maker is quoting 1000 shares and you want 1000 shares or less, you will need to place a SOES order to trade with him. In this case, any 1000 share or less SNET order would be instantly rejected by Nasdaq. However, you can place a non-obligatory SNET order preferenced to the market maker for 1100 or more shares. This will revert the SNET system back to a negotiated marketplace versus an obligatory market system. This SNET order size limitation will not apply to orders directed at non-participating ECN's. In other words, if the non-participating ECN is quoting 1500 shares, you will be able to place an SNET order to buy only 200 shares from him. In fact, SNET orders will be the only way to access any non-participating ECN through Nasdaq.
4) All SuperSOES orders will be executed in price/time priority. In other words, if you post an order on a participating ECN and you got to the price level first, then YOU are first in line for the next order coming into the system. This should greatly reduce the problem of being traded around and hit last. Note that the payment for order flow brokers (NITE, MASH, HRZG, etc) will still have the option to fill their own order flow internally at their descretion and will not be forced to submit their order flow into the Nasdaq SuperSOES system to hit your offer. However, in general, I think it will do a great deal to 'level the playing field'.
5) It's still uncertain whether participating ECN's will be able to charge their ECN fee to people filling orders against their order book through the SuperSOES system. This will likely be a major factor in determing whether the ECN will join this new system, and is a question which will ultimately be answered by the SEC.
6) Another interesting change is that, under most circumstances, market maker orders on the new system will immediately be removed from the inside bid/ask once their displayed and reserve size has been exhausted. This is a major improvement, as market makers will no longer be capable of halting a move in the market by merely filling one 100 share order every 17 seconds and refusing to back away from the inside market. For example, assume that the inside bid is 82 1/2, and there are three market makers displaying sizes of 300, 500 and 400 shares respectively. If you place a market SOES order for 1200 shares, you will 'take out' all three of the market makers and their quotes will immediately be eliminated from the Level II display and the inside bid will drop to the next highest level. The market maker will then have up to 5 minutes to post a new quote for the stock to replace the one that was 'taken out'. This is exactly what many of us have been suggesting as a 'fair' solution for a long time. Hopefully, it will work in practice as well as it seems like it should.
7) Reserve size. This is the term for when the market maker wants to display only 1000 shares, for example, but has an additional 'reserve size' of 10,000 additional shares he/she wants to sell. Currently, the market maker can post a displayed size of as little as 100 shares, with a reserved size of 10,000 shares and simply fill 100 shares every 17 seconds indefinitely. With the new rules, any market makers wishing to use the reserve size capability will be forced to display a minimum of 1000 shares. Also, any incoming orders will be automatically executed against the display AND reserve size. Therefore, for the above market maker with a display of 1000 shares and a reserve of 10,000 shares => you can place a SOES market order for 9000 shares which will get filled in its entirety immediately.
All in all, I think these changes sound GREAT!!! Maybe I'm reading too optimistically, though. I'd sure be interested in hearing the thoughts of others. In any case, Chris, thanks for the great link.
P.S. For those into this sort of thing... Grub, grub, 8000.