Q&A: Ships in the night

By: Ray Pellecchia

File Under: NYSE, NYSE

• 3 Comments
• Email Entry

A reader writes:

ray,

can you please explain to me that if Reg NMS is followed to the "T," How can you have a crossed or locked market more than a split second at a time?

Thanks,
jt

Another reader responds to JT:

The reason we have locked markets for more than a split second is that both parties are under the belief that they posted first. Their routing procedures state that if I'm first then the other exchange/ecn should route to me. Once a market is locked, neither party wants to route to the other to unlock the market because of they would lose the tape revenue (and they believed they were first). Until there is some sort of agreement in place between all market participants, locked markets are here to stay. One solution would be to require the smaller quantity of the two "locked" participants be required to ship to the the larger quantity.
-- Jimmy

Just to add to Jimmy's comment above, a colleague tells me that such scenarios are sometimes called "ships in the night" situations. Ships in the night can be created because NYSE will ship an order to another market center and then immediately proceed with an after-market quote. The "away" market center will process the incoming order and generate its own after-market quote without knowing what NYSE's quote will be, because NYSE's quote has not yet arrived via the Consolidated Quote System. The result is that each market thinks that its quote was published first.

I hope that explains the phenomenon a bit more. Thanks for writing, JT and Jimmy. In particular, I appreciate and encourage readers to respond to others' posts with their own perspective and experience, especially when I'm slow on the draw in responding, as I was in this case.

The term "ships in the night" kinda stuck in my head. I had heard it commonly used to describe two people or things moving in opposite directions, each unaware of the other, but I had never heard it used in this market context. I wondered about the origin of the term, and rather than do my actual work, I did a little bit of searching.

First I Googled it, and came up empty -- just a lot of references in amateur poetry. So I went old school and opened up my trusty Barlett's Familiar Quotations, and came up with three references to the term or something close to it.

Ships that pass in the night, and speak each other in passing,
Only a signal shown and a distant voice in the darkness;
So on the ocean of life we pass and speak one another,
Only a look and a voice; then darkness again and a silence.
-- Henry Wadsworth Longfellow (1807-1882), The Theologian's Tale: Elizabeth, IV

Note, Longfellow has the passing ships in communication, albeit distant and fleeting. I also note another market term -- a look -- which in these parts signifies a market snapshot or bit of "color" that a broker passes along to a trading desk or customer. I wonder if Longfellow dabbled in investing, or was just ahead of his time.

A couple of other similar images from his contemporaries:

Two lives that once part are as ships that divide.
-- Edward Bulwer-Lytton (1803-1873), A Lament

As vessels starting from ports thousands of miles apart pass close to each other in the naked breadths of the ocean, nay, sometimes even touch in the dark.
Oliver Wendell Holmes, Professor at the Breakfast Table (1860)

That's a pretty one too. Naked breadths of the ocean. I always wanted to use the word nay, but the opportunity presents itself so infrequently these days. I want to write A Lament, not A Blog.

But I guess I'm getting far adrift from the original topic here. Out of my depth. Sinking feeling. Throw me a life preserver, or a literary historian.

Oh well, back to work.

But not before mentioning that On This Day in 1970, the Beatles released Let It Be. (NYTimes.com)

Tags: New York Stock Exchange, Hybrid Market, NYSE, NYSE Euronext, NYX, trading, stock market, Henry Wadsworth Longfellow, The Beatles