June 3, 2004
comments on trade through restrictions.
I am an active trader in many ETFs. I believe that markets should be classified as slow and fast markets and not be given a narrow classification of auto-ex vs. manual. I believe the specialists would continue to shut down auto ex when it best suited them as they do now and in this way abuse the new rule to their advantage and prevent access to a Real quote instead of their own quote that may or may not be real.
The SEC talks about the best price. But a quote that doesnt have to be honored such as those of AMEX and NYSE is not the best price, as it makes the investor believe in a price that is not really there. Meanwhile the real price of the stock is changing. By the time the investor can access a REAL quote that is honored, the price of the stock has moved and he has received a worst price through price slippage.
I would much rather access liquidity in ECNs such as ARCA or Island at a price out of the inside market because i know their quotes are real and firm. From my experience trading ETFs it seems that specialists quotes are not real or firm at least half of the time. and if the market is moving their quotes are never real. they will NOT fill an investor unless it is to their own advantage. that is if you put a limit order at their price it is unlikely youll ever get a fill unless the market moves against you and they can make free money from your order. on the other hand limit orders on ecns are immediately executed it their is a price match.
The need to eliminate trade through restrictions is especially obvious on liquid ETFs such as QQQ,SPY,DIA,SMH since they act as a derivative instrument and the price at any given point in time is determined by tens of thousands of market participants including arbitrage programs that would not allow the ETF prices to deviate from the value of the underlying stocks they are composed of.
Specialists serve no purpose on liquid ETFs except to artificially hold prices for their own benefit and not that of investors.
If the SEC wants to keep trade through restrictions to the detriment of investors, it should force specialists to honor their quotes automatically at least in liquid ETFslike the Nasdaq market makers are forced to. Then and only then would the investor get the best price