Odd-eighth avoidance as a defense against SOES bandits

We model the behavior of Nasdaq momentum traders, also known as SOES bandits. We show, all things being equal, that the profitability of SOES bandits decreases in the bid-ask spread, but increases in the effective tick size. The patterns we observe in the data provide support for the model. We then discuss the plausibility of odd-eighth tick avoidance by market makers as a defense against SOES bandits. (Journal of Financial Economics)

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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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