Small Order Execution System

The Small Order Execution System (SOES) is a system to facilitate clearing trades of low volume on NASDAQ.

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Establishment

SOES was first introduced in December 1988 for 25 stocks. The lack of liquidity after the 1987 market crash led NASDAQ to implement a mandatory system (since June 1988) to provide automatic order execution for individual traders with orders less than or equal to 10000 shares. (For stocks with low volume, it may be less than 200 shares). Market makers must accept SOES orders and so this provides excellent liquidity for smaller investors and traders.

Rules

There are several restrictions for those who use SOES, rather than a traditional Electronic Communication Network (ECN), to place their orders.

1. Trades may not be in excess of 10000 shares for a particular stock.
2. SOES does not allow trades in stocks that are trading at prices greater than $25 per share.
3. Once a trader places an order through SOES, they must wait at least 25 minutes to place a trade through SOES on the same stock.
4. Anyone doing more than five trades a day is considered a professional trader, not a retail customer, and can be thrown off SOES. (Andy Kessler, How we got here, Collins Publisher, 1998)
5. Institutions and stock brokers are not allowed to place orders for their own accounts through SOES, but they can for a client's account.
6. Market makers must honor their advertised bid/ask prices to SOES orders, provided that they are for the amount that the market maker is looking for.

Initial reactions

Initially, when SOES was mandatory, it was met with heavy pessimism from NASDAQ member firms because it forced them to execute all SOES trades that met the market maker's advertised price. There were also significant limitations implemented to prevent day traders from exploiting the system and taking advantage of old prices quoted by market makers.

Impact

SOES has revamped the trading market for individual investors. It has given small investors and traders the opportunity to compete on a level playing field with larger investors such as institutions for access to orders and execution.