Mr. NBBO meets Capt. Best Execution

By: Ray Pellecchia

File Under: NYSE

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A reader writes in response to a post about penny jumping:

While black boxes do indeed make up the majority of "pennying" in limit orders, it's always with smaller size than the specialist, and at less critical points.

Some specialist web sites brag about the high interaction rate with customer orders. Of course this is code for 'we chronicically penny.'

I've traded 10's of millions of shares on NYSE, and it's cost me a couple million ....thats just 1 person using 98% limit orders. Pennying IS a major specialist problem. The price improvement received is near 1/4 that of the cost of pennying.

I'm also quite suprised to see NYSE Specialist trade through ARCA, after the deal, by 4-6 cents....pennying a book limit at 5-7 beyond the ARCA quote. Even the "new" NYSE ECN (arca) orders get ignored, and the book orders get pennied.

Hope the proposed rule changes help. -- Mr. NBBO

This makes two anti-specialist rants on this topic, one from "phantom of efficient trading" and now this from "Mr. NBBO" (that's national best bid or offer, to you newcomers). Is there some kinda club out there? Who's next, Dr. Liquidity? I call dibs on "Capt. Best Execution."

On the subject of trading through, the NYSE Hybrid Market will include auto-routing and auto-execution features to address the issue. We blogged about that here.

On the topic of penny jumping by specialists, I guess I just have to agree to disagree with you guys. If you don't buy my arguments in my original post (i.e., most pennying is done by brokers on behalf of customers, specialists do less than 9 percent of the trading, NYSE has the highest fill rates, etc.) I don't think that expounding on them here is going to get us anywhere.

Is it the whole concept of price improvement that you object to? You've already read in this space that we intend to continue making price improvement a hallmark of this marketplace.

I appreciate your writing, but I've gotta admit I'm baffled by the numbers and experience you claim. And I'm a little conflicted on the anonymity thing here. I don't want to prohibit anonymous posts, because I don't want to dampen the discussion. At the same time, it would be irresponsible to provide an unlimited forum for anonymous, disparaging remarks about any market participant, including specialists.

So here's where I come out: If you are indeed a customer and not just someone using the cloak of anonymity to rake specialists, and you don't want to use the Market Surveillance online mailbox I mentioned, then the only constructive thing I can suggest is to send me your name and number (I'll publish neither) and I'll ask someone who knows these issues inside out to call you to hear you out.

Absent that, and the ability to explore and discuss real facts and situations, I don't see how this particular conversation is going to get us anywhere.