The SuperSoes trade execution system, which Nasdaq is attempting to roll out for the third time this week-two prior attempts, last July and in January, failed for technical reasons-combines features of the current Small Order Execution System (Soes) and Selectnet.
SuperSoes promises to be faster and more reliable, but it’s a toss-up whether SuperSoes will actually attract users given that its predecessor, Selectnet, will continue operating.
SuperSoes disadvantages include the time and expense of adjusting current trading systems and compatibility problems with ECNs, in addition to Nasdaq’s history of problems with rolling out new technology.
“I don’t think the takeup to SuperSoes is going to be that high,” said Damon Kovelsky, an analyst with Meridien Research. “I think it’ll take three to five months until you see trading on SuperSoes picking up.” However, he said, overall SuperSoes is a good step for Nasdaq, especially as it moves toward the SuperMontage system, which promises to modernize the Nasdaq trading environment. “It’s probably one of the more intelligent things that Nasdaq has done, technology-wise,” said Kovelsky, who views Nasdaq’s step-by-step implementation as a good move.
“Underneath it all is an admission that we can’t do everything at once, that we have to do this one step at a time and there’s absolutely nothing wrong with that,” he said.
But not everyone is applauding the graduated approach, which leaves traders to deal with multiple systems and may be confusing and cumbersome. “They shouldn’t have done SuperSoes as an interim step,” said Deborah Mittelman, VP of execution at Instinet. “They should have waited until they can handle it all in one system. It’s one example of how Nasdaq is using their control of the market system. They’re abusing their role.”
ProTrader Securities, which recently signed a letter of intent to combine with Instinet, sees advantages in SuperSoes. “The market is so thin on Soes with the 1,000 share restriction, there are a lot of reasons not to use Soes,” said ProTrader CTO John Bunda. “SuperSoes will drop delays between executions against particular market-makers and make Nasdaq operate much more like an ECN.”
As a result, SuperSoes may actually take business away from ECNs, said RediBook ECN Llc President Larry Leibowitz. “People probably prefer us because we offer immediate execution, and now market-makers will be providing immediate execution themselves,” he said.
In addition, ECNs won’t be able to fully participate in SuperSoes because of the double execution risk. If an order is posted both in an ECN’s internal book and on SuperSoes, there’s a chance it will be executed twice, Leibowitz said. “We’d end up in an error account.”
As a result, no ECN plans to fully participate in the SuperSoes system, and that’s bad for the market, said Mittelman. “They’re now splitting up market-makers on one system, ECNs on another,” she said. “There’s no interaction between the two. It’s an unlevel playing field and a confusing system.”
Nasdaq maintains that ECNs aren’t at a disadvantage in a “SuperSoes world,” said Nancy Eichorn, managing director of Nasdaq Transaction Services. “Initially, they’re being cautious about receiving inbound orders,” but that could change in the future, she said. Meanwhile, ECNs can still send outbound orders through SuperSoes. ECNs also use Selectnet in a way that mimics an auto execution system, she added.
On the plus side, SuperSoes may improve the trading environment for customers both in and outside of ECNs due to improved execution and liquidity.
“SuperSoes is going to prevent market participants from backing away from their quotes,” said Kim Bang, president of Bloomberg Tradebook. “That means that our clients, when they go externally from the Tradebook environment, will get more efficient access to a greater amount of liquidity. As a result, we’re going to do more business.”
Since SuperSoes is an extension of the existing Soes system, the transition to this new trading mechanism is not necessarily cumbersome, said some. “I have not heard that expense is a concern,” said Stuart Kaswell, general counsel of the Securities Industry Association. “People are looking forward to it because they think the benefits are worthwhile.”
That’s because the larger broker-dealers already have systems that connect to SuperSoes and Selectnet and only require minor modifications, said Mittelman. Small traders, however, will be hurt by SuperSoes, she said, because “they have to go to two different systems to get their order executed.”
Other ECN executives agreed, as did Alan Davidson, president of the Independent Broker-Dealer Association. “Each time there’s a change, it becomes more difficult for the small firms to change and adapt,” he said.
He said most Nasdaq firms can’t make the investments in technology that the larger firms can. As a result, implementation of SuperSoes-as well as other recent changes at Nasdaq-will help drive the smaller firms out of business, he said. Instead, Nasdaq should create one single central system, he said, and simple procedures for traders.
Nasdaq officials said they had no plans to move to a single book, but argued that SuperSoes will not make life more complicated for small brokers. “In today’s world, they already use Soes and Selectnet,” said Karen Peterson, project manager of SuperSoes. “We’re making it so that you don’t have to work as much with Selectnet.”
Also, she said, Nasdaq has improved its workstation so that, for example, one click represents the inside and the workstation will determine whether to send the order to Soes or Selectnet or both.