This is an important post for individuals who place odd lot market orders. According to a representative from NYSE Arca, the fill of my 50 share market order on 3/26/2010 to buy STDPRB was a legal fill at $18.85 even though round lots were trading at $18.45 to $18.49. This is the explanation.
Knight Trading sent the order to NYSE ARCA. NYSE ARCA would treat a odd lot trade in the same manner as a round lot. However, NYSE ARCA did not have the national best offer. The NYSE had the national best offer at 18.49, so ARCA kicked my order to the NYSE. For reasons unknown, possibly a system glitch, NYSE kicked the order back to ARCA. The best bid on ARCA was $18.85 which is where ARCA filled the order. According to the representative ARCA's responsibility under SEC rule NMS was fulfilled when it transferred the order to the exchange with the best national offer. All of this would have happened in less than a second. Theoretically, if there was a higher ask price than $18.85, it would have been legal to fill the order at even a significantly higher price, since apparently there is no circuit breaker to prevent a fill in these circumstances that is too far away from the national best offer. Also, the NYSE and NYSE ARCA are apparently treated as two separate stock exchanges so NYSE ARCA did not have to fill the order at the best price posted by the NYSE, even though both companies are owned by NYSE Euronext, which is quaint if true.
I am not vouching for the accuracy of what was told to me but simply relaying what I was told over the phone by a NYSE ARCA representative.
Regulation NMS requires the exchange to seek the best price for customers rather than to offer the quickest executions. Regulation NMS - Wikipedia Rule 602 --Dissemination of Quotations in NMS Securities
More information about NMS is available from the SEC's web site: Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS (page 38 deals with odd lot orders)
As I see it, my latest problem, the execution of the 50 share market order for STDPRB, has less to do with odd lot orders than with market orders in general. If the NYSE had kicked back a 100 share order to ARCA for STDPRB, it would have been filled at 18.85 too, which was ARCA's best ask price at the time and possibly the best ask at any exchange other than the NYSE. If there had been a better price than $18.85, then the ARCA representative says ARCA would have kicked the order to the exchange with the better price than $18.85.
So I am going to cut down on the use of market orders in general, both for round and odd lots.
See previous discussions: NYSE Rule 124 (C) & Item # 4 Odd Lot Orders
I also found this policy statement from Interactive Brokers that prohibits routing odd lot orders to NYSE ARCA: www.interactivebrokers.com
Also, it is natural to ask and to wonder out loud why Knight Trading sent my order on 3/26 to ARCA when the best national offer was at the sister exchange, the NYSE. If the order had been sent to the NYSE rather than ARCA, it is my understanding that my order could not have been kicked to ARCA by the NYSE, since ARCA did not have the best national offer.
Based on my own similar experience with odd lot orders, for my own peace of mind I will no longer use market orders EVER. I will also not place an order for less than the "All or None" fill requirement at my broker, currently 100 shares.
ReplyDeleteThanks for pursuing this issue in your blog.
Cathie: I find it interesting that Fidelity had virtually all of their facts wrong when their representative wrote back to me. ARCA did not have the best national ask price and there was no matching of my odd lot offer with a similar odd lot ask. Instead, the order was routed to the exchange with the second best offer, who then kicked it to the NYSE with the best national offer. All of those offers on both exchanges were round lot offers.
ReplyDeleteIt is possible for any investor to pursue this kind of inquiry by simply filling out a complaint or inquiry form at the NYSE web site. The NYSE Arca representative check everything out and spent about 15 minutes on the phone with me yesterday explaining what happened. My conclusion was that a 500 share market order would have been filled at 18.85 in the same way as my 50 share odd lot order after Knight sent the order initially to NYSE ARCA who did not have the best national bid. That was what caused the problem for me. ARCA did what it was supposed to do, forward the bid to the NYSE which had the best national offer. If Knight had forwarded my offer initially to the NYSE rather than ARCA, it would have been filled at 18.49.
I do not know but suspect that the NYSE has a deeper book of offers than NYSE ARCA.
What I am going to do now is to use mostly limit orders except on major stocks like a GE, JNJ etc. where I have never had a problem with market orders.
I have not had a problem recently in getting a quick fill on an odd limit order when my limit price is equal to the ask price. That would at least avoid the kind of problem which I have experienced such as the STDBPRB fill.