The Need for Trade-At Rule

Impact Technology has on the Market

The liquidity of US Stock Markets have been greatly impacted by the rapid advancement of smart computer algorithms working in conjunction with ECNs (Electronics Communication Networks), ATSs (Alternative Trading systems) and Dark Pools.  The automation of smart computers along with liquidity in off exchange venues has contributed to a dramatic increase in trading on these alternative venues and have caused quite a dramatic decrease in volume traded on registered exchanges. 

It is this high speed coupled with the choice of using an ATS for fast execution and low cost that was a catalyst to what we now refer to as High Frequency Trading (HFT).  HFT firms incorporate the speed from smart computer algorithms which gives them the ability to see orders in process, and buy them up for themselves.  Since they can see all pending orders, they know if they’ll be able to turn around and sell at a slightly higher price, even in the sub-penny price range.  On high-volume orders, fractions of a penny add up to millions of dollars. 

Sub-Pennying

This combination of speed from computers and liquidity in ATSs, added to the decimalization of the markets in 2001 has spurred another predatory practice referred to sub-pennying, which goes right along with HFT, and occurs regularly today. 

Sub-pennying occurs when a broker gets in front of a displayed order by 1/100^th of a penny, or .0001.    This is all done inconspicuously with a computer algorithm program that allows them to see an order is pending, so they’ll buy up shares within a sub penny difference.

Sub-Penny trades occur because POF firms have to validate taking the trade for themselves, so they improve the price by .0001. The market is showing $10.00 x $10.01, so when an order comes to the POF firm to sell at $10.00, they fill it themselves at $10.0001, letting them claim they improved the price for the customer. The truth is that there is probably a bid in a dark pool at $10.005, that the POF firm will then sell, immediately making themselves .0049/share in the process. Even if there isn't anything in the middle that they can immediately get out of the trade, they are far from the bid, which is what all bidders in the market at $10.00 wish they could be.  All other bidders  never get the chance, however, as the POF firm steps in front of them without ever having to risk putting a bid into the open market.

This leaves traders experiencing whiplash in a scenario of “here one minute (second in this scenario) and gone the next” when attempting to execute their orders.  

Most traders that we talk to agree – a Trade-At Rule is necessary.

Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.