Man Vs. Machine: How the Crash of ’87 Gave Birth To High-Frequency Trading

A small coterie of savvy investors smelled an opportunity. Since the SOES trades were automated, meaning they received almost instant execution, and were given priority ahead of the rest of the market, a fast-moving trader could move in and out of stocks using SOES at a far-more rapid clip than large investors, generating big profits. (CNBC)

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SOES Bandits revisited

Who remembers Sheldon Maschler?  Harvey Houtkin?  They were the original SOES Bandits.  Sheldon headed up the infamous Datek Securities.  In 1989, with the help of two boy wonders, Jeff Citron and Josh Levine, they created Watcher, a software program that allowed day traders to take advantage of a weakness in the SOES system: relatively slow updating of price quotes.  SOES was intended for small orders, but Datek was using the system for large trades, buying stocks and then selling them again within seconds. (Themis Trading)

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Market Making with Costly Monitoring: An Analysis of the SOES Controversy

SOES bandits are investors who use Nasdaq’s Small Order Execution System (SOES) for day trading. We develop a model of market making with costly information monitoring and examine the impact of SOES bandits on spreads and price discovery. Costly monitoring hampers price competition since dealers can share the monitoring costs and earn prots by matching rather than undercutting their competitors’ quotes. Bandits tend to counteract this eect and add competitive pressure. The interaction between these eects determines whether a policy that relaxes the rm quote rule improves spreads, price discovery, and liquidity. We report empirical evidence consistent with the prediction that bandits prefer to trade stocks with small spreads, but only weak evidence supporting the prediction that trading by the bandits lead to wider spreads. (School of Management, Princeton University, Wharton School, University of Pennsylvania, CEPR)

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All-Tech’s Harvey Houtkin Agrees to Fine, Suspension

Securities regulators took a high-profile stand to stamp out alleged abuses in the freewheeling business of “day trading” of stocks. In two separate legal actions, All-Tech Direct Inc., one of the nation’s largest day-trading firms, and several of its executives agreed to pay a total of more than $600,000 in fines to settle regulatory charges of arranging improper loans to clients, among other things. Harvey Houtkin — All-Tech’s chairman and chief executive officer, and the self-proclaimed father of day trading — agreed to a $50,000 fine and a 15-day suspension from the securities industry as part of a settlement with the National Association of Securities Dealers. (Wall Street Journal)

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Day-trading’s father: All-Tech chief Harvey Houtkin is a hated man on Wall Street

After the crash of 1987 – when the finger was being pointed at market makers who refused to pick up their phones as the markets went into freefall – the Small Order Execution System (SOES) was made mandatory and a 1,000-share limit imposed. Market makers had to execute trades at whatever price they had posted. Since SOES was done over computers rather than telephones, it also meant instant execution. All-Tech chef Harvey Houtkin realized that if you could catch the market makers napping you had a discrepancy between the actual price of a stock and a price someone had to take. It was the perfect arbitrage, and it made Houtkin a fortune. (New York Post)

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The trading profits of SOES Bandits

SOES bandits are individual investors who use Nasdaq’s Small Order Execution System (SOES) for day trading. Their average profit per trade is small, but they trade dozens or hundreds of times per week. Bandits usually establish a position before most market-makers have updated their quotes, and lay off the position at favorable prices through Instinet or SelectNet. (Journal of Financial Economics)

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