SOES (Small Order Execution System)

The small order execution system, or SOES, was a system that was developed by NASDAQ in order to help individual traders. With this system, individual traders could place orders on stocks even if liquidity was low. This tool gave smaller investors the ability to buy and sell quickly and efficiently, but it is largely unused today. Here are the basics of the SOES.

SOES

This system was first implemented after the stock market crash of 1987. The NASDAQ felt that individual traders could not buy and sell securities because their orders were not big enough. Therefore, they invented the small order execution system to accommodate this need. With this system, individual traders could buy or sell stock, and market makers had to process the orders immediately. This provided liquidity for the individual trader. This system was originally designed with 25 stocks that could be bought or sold.

Small Orders

In order to qualify to use this system, you would have to buy or sell less than 1000 shares of a particular stock. In some cases, the maximum number of shares for a stock was 200. When using this system, you could also purchase only stocks that were currently trading for less than $250 per share. This means that you could work only with smaller stocks and smaller quantities of them. 

Other Rules

This particular trading system had other rules that you had to abide by in order to utilize it. When you used this system, you had to wait at least five minutes between orders on the same stock. Once you placed the first order, you had to wait a little while before you could place the second trade on an identical stock. This was to prevent people from trying to use scalping as a trading strategy with the system. 

Institutional Traders

Institutional traders were not allowed to utilize the small order execution system for themselves. If they had a client that wanted to use the system, they could execute a trade through the system on the client's behalf. However, when it came to trading their own accounts, they did not have access to the system. 

Market makers also had to honor prices on securities that they advertised with the system. This means that the market makers did not manipulate the price and try to increase their returns. This provided transparency for individual investors.

Impact

This system was met with a great deal of negativity by the institutional investors and brokerages in the market. At the same time, individual traders liked the idea of being able to compete on a level playing field in the market even if they did not want to place large orders. Having to fill orders at the advertised price was something that market makers did not like for the most part. 

With advancements in a way that the markets are constructed, this system is no longer mandatory. Traders can now get instant execution on nearly any order that they place without the small order execution system.

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