The Small-Order Execution System (SOES) was a system to facilitate clearing trades of low volume on
NASDAQ
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
. It has been phased out and is no longer necessary.
Establishment
SOES was first introduced in December 1984 for 25 stocks to provide automatic order execution for individual traders with orders less than or equal to 1000 shares. The lack of
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqui ...
after the
1987 market crash led NASDAQ to enforce mandatory use of the SOES by all market makers using the NASDAQ National Market System,
providing excellent liquidity for smaller investors and traders.
Rules
There were several restrictions for those who used SOES, rather than a traditional
electronic communication network
An electronic communication network (ECN) is a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges. An ECN is generally an electronic system that widely disseminates orders ...
(ECN), to place their orders.
* Trades could not be in excess of 1000 shares for a particular stock.
* SOES did not allow trades in stocks that were trading at prices greater than $250 per share.
* Once a trader received an execution through SOES, they had to wait 10 minutes to place a trade on the same side of the market in the same stock.
* Institutions and
stockbroker
A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks an ...
s were not allowed to place orders for their own accounts through SOES, but they could for a client's account.
* Market makers had to honor their advertised
bid/
ask price
Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states they will accept.
The seller may qualify the stated asking price as firm or negotiable. Firm means the seller is implying that the price is fixed ...
s to SOES orders, provided that they were for the amount that the market maker was seeking.
Initial reactions
Initially, when SOES was mandatory, it was met with heavy pessimism from NASDAQ member firms because it forced them to execute all SOES trades that met the market maker's advertised price. There were also significant limitations implemented to prevent
day trader
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and ...
s from exploiting the system and taking advantage of old prices quoted by market makers.
Effect
SOES revamped the trading market for individual investors. It gave small investors and traders the opportunity to compete on a level playing field with larger investors, such as institutions, for access to orders and execution.
References
External links
Complete Guide On Buying Shares
Share trading
{{Stockexchange-stub