This question is addressed to anyone familiar with the ARCA ECN and Nasdaq trading. The market is 20.00 x 20.01. I have an offer on ARCA at 20.01 for 1000 shares. Now let's say there are no ISLD or INCA offers anywhere on their books. Now an ISLD or INCA order comes in to buy 1000 at 20.10. What happens to my ARCA order? Does my order get filled at 20.10,20.01, or not filled at all?
Since the ISLD/INCA bid would cross the market they solely go to their respective books, not the Nasdaq L2. So if I understand things correctly, you would not be filled. Of course, if an ARCA bid came in above your ARCA offer you would be filled immediately (although it would be interesting to know where, 20.01 or 20.10, since either figure or anywhere in between would satisfy both limit orders?)
Magna, not really true. As you know, ISLD will still display a lock/cross order in the Level 2 (provided it is not matched instantly) but it will change the DISPLAYED price to the bid price (assuming the spread was at one penny) to satisfy the lock/cross quote rule. I believe that ARCA handles it like ISLD (unlike INCA) and gives the price improvement to the aggressive order (as defined by the second-or newest-order of two orders that are matchable. Vinny-you just knew I couldn't resist your question....and the answer is......depends on whether ARCA could match the order via BTRD or REDI books (or any other ECN via SNET) and if not, whether the order had already been delivered to SuperSOES when the ISLD bid at 20.20 came in. You have (again) touched upon the "black box" area of the new and revised super ARCA algorithm. ARCA folks have told me flat out that ARCA will in fact "see" a match that comes in from another ECN (eg ISLD), one that DID NOT exist when the order was received by ARCA, which ARCA is simultaneously "working" when the ISLD bid comes in. THus, they tell me it will re-direct your order back to ISLD in this case and match with that bid. However, when and how this actually happens (in the "life" of your order...well that seems to be the "black box" part because they simply cannot explain it to me. Finally, my guess-but I do not know-is that YOU would actually get the price improvement here since ARCA should feel no need to give the ISLD guy price improvement.
I have found that I would not get filled on the arca in the situation you described. If ARCA (and Redi) is posted forst, then the crossed order comes in, I woun't get it. you put in the ARCA after the isld crosses, you will get the island and the price improvement. Also, ARCAs preferencing function is always slower than redis.
My guys tell me that there will be no "price improvement" on this, and that the order may not even get filled at the designated price. I actually ran this by the "boys" at ARCA, and did not get a definitive answer. Since we have merged Redi and ARCA, I am doing my best to get all available information on the order routing, placement, execution, etc. Keep the specific questions coming...it will really help. As I find in many cases, some programmers are not traders, and have a hard time explaining their executions. I am optimistic that at least we are moving in a strong forward position with the ECN's. Did anyone (else) anser that questionaire about ECN"s? I was just curious about the nature of some of the questions, they seemed a bit "anti exchange" in the format. ??
ARCA should look to filling this order at the price improvement, but as DATTrader points out, this is somewhat, as he says a "Black Box". ARCA has to pull the offer from Level 2 and then route to ISLD or INCA. If the Bid is popping in and out on let's say the ISLD book, ARCA might not get there. The mechanics are in place with ARCA algorithm for this order to be price improved and outward preferenced, but as everyone knows things are happening very quickly during market hours, so this is a bit of a grey area. If you see this scenario often on the particular stock you are trading then direct your order to that other ECN. This is the advantage of having a broker who offers multiple routing choices.
DATTrader, I was aware ISLD would do as you say, but in the given example with the market at 20.00 x 20.01, if he's offering on ARCA at 20.01, and that ISLD bid comes in at 20.10, as you say it will be displayed on L2 as 20.00. And, if so, while it might match internally with other ISLD offers, wouldn't he not be filled? I guess it comes down to how well ARCA would "see" the ISLD bid. :eek: BTW, this is a good thread as I'd sure like to clear this up as best as possible.
That is the issue for sure...... As TNO Mike pointed out, exactly how and when ARCA would see this new ISLD bid is not exactly clear, it has simply been stated that ARCA can do this. The thing that has always seemed hard for me to envision is an order going out to SS and then being cancelled to pull it back so it can be re-directed to -in this case-ISLD. I know computers are lightning fast and what not but in markets with bids/offers bing hit/taken, etc. it just seems hard to believe. What if ARCA pulls the SS order-which was about to be filled-and then goes to cross it against the ISLD bid but some other size trader hits it a split second earlier...meanwhile the MM pulled his bid and ARCA now has no match for the order. You know this would happen all the time if ARCA was QUICKLY re-routing to bids/offers that come in after the original order. Hard to envision.
By the time ARCA decides what the hell to do in this scenerio, some scaper will have allready taken advantage of this situation by selling the crossed isld at 20.1 by offering on isld and getting price improvement and hitting your arca offer at 20.01 to get the hell out. easy 9 cents in a second. That is part of how we make our living, looking for easy trades.
Speed, Agreed, that is why I have the ARCA algorithm "turned off" on my platform...I just use it like I would ISLD, taking liquidity when it is there for the taking...and ignoring it when its not. As far as adding liquidity (bidding/offering) I will usually do it through ISLD but do use ARCA and REDI as well