The main systems are:
● Through the market makers participating in the Nasdaq Market Center
● ECNs
● SuperDOT
NASDAQ DIRECT
The Nasdaq Market Center is where market makers conduct the business of buying and selling stocks. The Market Center is a fully integrated order display, execution, and trade reporting system for all securities listed on Nasdaq National Market®, Nasdaq SmallCap MarketSM, NYSE, and Amex. The Market Center offers trade executions and reporting for more than 6,700 securities.
SuperMontageSM is Nasdaq’s display and order execution system designed to help reduce fragmentation, provide best execution, expand the number of choices to market participants, and better handle the growth of the market. The order routing and execution segment of SuperMontage replaces SuperSOES and SOESSM orders. The basics of SuperMontage are discussed next.
SUPERMONTAGE
The SuperMontage system will attempt to match your order with the best price available at the time it is received. Odd lots are accepted, but will be grouped with other odd lots to create round lots before being executed. Dual-listed securities can be round lots only if sent to SuperMontage.
SuperMontage does not use a tier limit system. As such, tier limit restrictions are no longer applicable for any Nasdaq National Market Securities (NMS) or Nasdaq SmallCap Market securities (SC). Over-the-Counter Bulletin Board (OTCBB) stocks cannot be traded via SuperMontage order routing.
Any portion of a SuperMontage order that attempts to execute “10% + $.01” away from the inside market at the time of entry will be rejected. For example, in stock ABCD, the current inside bid is $10.00. You enter a market sell order for 5,000 shares. There are currently 4,000 shares bidding between $8.99 and $10.00, with another 100 shares available at $8.98. Based on the preceding formula [$10.00 −($10.00 × .10) − $.01 = $8.99], the threshold price will be $8.99. Therefore, 4,000 shares of your order will execute, and the new inside bid will be $8.98. The remaining 1,000 shares of your order will be rejected, as there is no additional liquidity at or above the threshold bid price.
Market participants are obligated to comply with the “Firm Quote Rule,” which means they must execute an order presented at a price at least as favorable as its displayed quote, up to its quoted size. This is also called a liability order. Transaction hours are 9:30 A.M. to 4:00 P.M. eastern time.
Market makers and ECNs can post to Level II anonymously by sending nonattributed orders to the market. Nonattributed orders are displayed in the Level II montage under the size identifier. For each price level, all nonattributed orders are aggregated under this identifier; however, unless you subscribe to Nasdaq TotalView, size will display only one quote on each side of the montage—the best-priced, nonattributable bid and ask in the system. If your order is filled by a nonattributed participant, you will see the participant’s ID when the transaction is complete.
Another type of SuperMontage order is the SuperMontage Directed order. SuperMontage Directed sends orders to market makers and ECNs, either directly or broadcast to all available participants at once. Order quantity must be 100 shares over the size the market maker is posting. Otherwise, your order may be rejected. For example, if a market maker is posting 900 shares and you wish to purchase 1,000, you may send your order for 1,000. If the market maker is posting 1,000, you must send your order for 1,100, or find a market maker who is posting 900. No counterparty is obligated to fill SuperMontage Directed orders. There is no tier limit on a SuperMontage Directed order. If your order is directed to a market maker at its posted price, it has 15 seconds to fill the order, reject the order, or move off of the price. Orders cannot be canceled for 5 seconds after being placed. The transaction hours are 9:00 A.M. to 6:30 P.M. eastern time.
TOTALVIEW
Market maker activity can be viewed on all Level II screens. Level II shows each Nasdaq participant’s best bid and ask and the size available. Some brokers charge a fee for Level II. Besides just basic Level II, some offer a new product from Nasdaq called TotalView. TotalView shows up to five quotes per market participant per side. (Note that participants are not obligated to post five quotes, but they do have the option.) In other words, TotalView has the same data as Level II, plus up to four more quotes per side per participant.
TotalView also includes an aggregate of the first five price levels and the total number of shares at each price.
ECNs
It’s time to discuss ECNs in greater detail. They were created in response to a growing need to create fair and efficient trading that was more accessible to individuals. They came about after the SEC passed the order handling rules of 1997.
ECNs allow Nasdaq customers, traders, or investors like you and me to trade directly with each other or to place orders directly into the marketplace. This process eliminates the intermediaries. In the beginning they handled fewer than 5 percent of all OTC trades. They now control over 35 percent of Nasdaq volume, and that number continues to grow.
In 1998, the SEC passed a regulation called Alternative Trading Systems (ATS). This allows ECNs, such as ARCA, REDI, and others, to become electronic securities exchanges. As for-profit exchanges, each ECN has its own individual trading system and computer algorithms. Understanding how each ECN works, and under what situations each works best, will enable you to get in and out of positions quickly.As a trader, my biggest concern is liquidity.
Liquidity is the ability to quickly turn stocks into cash. The ECN that provides the best liquidity and reliability is the one you should use. When trading on an order-matching ECN, volume is critical. Otherwise, there will be little liquidity for the trader. A computer algorithm system is not self-contained. This type of ECNwill automatically search the entire market to get the order filled. It literally helps the trader decide where to go for liquidity.
The list of available ECNs is constantly changing due to failures, consolidation, mergers, and acquisitions. What is most important is which ones are offered by your direct access broker. The main ECNs as of this writing are ARCA, INET, BRUT, ATTN, and BTRD. BRUT is now owned by the Nasdaq; ARCA has merged with the NYSE; and INET has also been acquired by Nasdaq and is awaiting regulatory approval. Following is a brief description of the main ECNs: INET, ARCA, BRUT, and ATTN. Not all the order types are available through all direct access brokers, and the hours may vary from broker to broker.
ARCA
Gerald Putnam formed Archipelago in 1996 in response to the new order handling rules implemented by the SEC. It began in 1997 as one of the four original ECNs approved by the SEC. Archipelago is accessible to traders, easy to use, and inexpensive. It also has a great deal of liquidity.
Codeveloped by Townsend Analytics, Ltd., and Terra Nova Trading, Archipelago allows traders to post bids and asks into Nasdaq Level II and on some stocks in the NYSE. Archipelago also operates on a computer algorithm. Best execution is facilitated by its proprietary SmartBook technology, which looks for the best price for an order internally or externally. This book server, the heart of the Archipelago system, maintains a current real-time account of all bids and offers for each Nasdaq stock. If an incoming order crosses or locks an existing internal order, the order is executed immediately. If no crosses or locks occur, and the order reaches the top of the Archipelago book, it will be sent to Nasdaq for display. The best bid and ask posting 100 or more shares will post on Level II if it does not cross or lock the market.
Hours of operation are 4:00 A.M. to 9:30 P.M. eastern time. Limit orders can be entered and will be queued until the limit order auction at 4 A.M. eastern time. Individual brokers may have different hours of operations. For more information go to ARCA’s web site at www.tradearca.com.
INET
INET is the result of a merger between Instinet and Island ECNs. Instinet is the original ECN. It was founded in 1969 and acquired by the Reuters Group in 1987. Established in 1997, Island’s mission was to provide investors with an open, transparent, and fully accessible marketplace. It operated on one simple principle: It automatically matched buy and sell limit orders for equities. It was inexpensive, easy, reliable, and liquid. It changed the way everyone looked at day trading. Together now as INET, this is one of the most powerful ECNs available.
Where the acquisition by the Nasdaq will take it is anyone’s guess, but odds are it will be good for the day trader. INET is an order matching system and accessible only to other INET subscribers. Orders not immediately matched are added to the INET order book, a database of available orders, where they wait to be matched in price-time priority.
Orders will not be routed to other market participants for execution. All INET subscribers are anonymous; no subscriber’s identity is disclosed before, during, or after an execution. The top INET book bid and ask quotes are displayed on Level II with the INET or CINN identifier. Currently, hours are 7:00 A.M. to 8:00 P.M. For more information, go to the INET web site at www.inetats.com.
Brut
In its early phases, when it was owned by Brass Utilities, this ECN catered mostly to institutional investors and broker-dealers. Now, after being purchased by the Nasdaq, it is available to all traders. Brut offers broad market access, with routing to all major destinations. In addition, all firms, both market maker and order entry, can now post orders in the National Market System using Brut. Firms can use Brut to access the NYSE via its DOT router and access the Amex and regional exchanges. Your DOT orders will sweep the Brut, Nasdaq Market Center, and INET exchange-listed books before being sent to the floor if not already filled. For more in-depth information on the variety of Brut order types your broker may offer, go to the Brut web site at www.nasdaqtrader.com/ trader/tradingservices/productservices/productdescriptions/ brutdescription.stm.
ATTN
Attain (ATTN) was introduced in 1988 by All-Tech. It was founded by Harvey Houtkin, often referred to as the father of electronic stock trading. Houtkin has long advocated the reform of investing rules and regulations. ATTN was acquired by Domestic Securities and then, more recently, by Knight Capital Group, Inc. Like INET, Attain is strictly an order matching system. Orders that are not matched in the ATTN book will be displayed on Level II if the order is for more than 100 shares and at the inside bid or ask and if it does not cross or lock the market.
Hours are 8:05 A.M. to 6:30 P.M. eastern time. At this time, ATTN accepts only limit orders.
SUPERDOT
Electronic access to the listed markets is evolving rapidly. Currently, SuperDOT is the most common way for traders using a direct access platform to trade listed securities. SuperDOT is an electronic means of gaining access to the listed markets. It is responsible for the vast majority of all orders on the NYSE. SuperDOT can handle up to 99,999 shares at a time. It gives individual investor orders of less than 2,100 shares priority over the large institutional orders. It links the member firms directly to the specialists who will rapidly execute orders.
The specialists’ job is to pair orders, fill orders from the inventory, or place orders on the limit order book. The purpose of the limit order book is to give specialists time to organize the book while establishing an orderly market.
In recent times, third markets like the Chicago, Philadelphia, and the Pacific Stock Exchanges have entered the picture by guaranteeing to fill orders at the best price on the NYSE. Day trading firms across the country can access the specialists through these third markets. With more and more listed securities trading on ECNs, and with the merger of ARCA and the NYSE, things will be changing rapidly.
Read More : Direct Access Order Entry System
