December 1, 2011
As a retail trader of over 30 years, who only became a Series 7 trader this year, I'd like to comment on the rule. These are my own comments do not necessarily represent the opinions of Bright Trading, nor its other traders. Also, rather than a financial degree, I hold a Ph.D. in Electrical Engineering from OSU a J.D. from OCU. My specialties are computer programming, signal processing signal estimation.
My only regret is that Groucho Marx cannot help with this, because in Marx Brother fashion, he would have made so much fun of sub-pennying that nobody would dare to suggest it. So let's begin.
The claim of the sub-penny-ers is that they are producing price improvement. As a retail customer, they are supposedly on my side, filling my orders, so why should I agree to give them 90% or more of my penny? The most I ever paid for a mutual fund was in about 1981 3% for Fidelity Magellan, when it was small. So, historically, until now, I've never done worse than getting 97% of my penny
Just to drive home this point today, I turned on TOS Prodigio and set it to retail trade the SP 100. I got all kinds of crazy prices. Frequently the so-called price improvement was only 1 cent or under 10 cents. The TOS fiduciaries should be made to disgorge their ill-gotten gains from sub-penny-ing, in my opinion (99 cents on 10 million shares is $99,000.00 per day, but only $1000 for customers)
Moreover, the odd-ball prices are a trading distraction. When I look at the prices, having to round up because something is 99 cents just takes more time. So I believe I would opt to just give me my whole penny, please, TOS (Other than this, TOS is a terrific company, which is why I'm trading there)
Harsh words, but now let's examine the case more closely. On most of the stocks traded, the bid-ask spread was more than a penny. In fact, on many stocks under $100, the spread was several cents. If the sub-penny pricing all flowed out to the exchange, the spreads would come down, generating more price improvement rather than hiding the trade. Groucho would have made all sorts of fun of this so-called price improvement (Just read Groucho's letter to Warner Brothers)
Much ado about nothing is made of how detailed the pricing should be. Using present tools, four full significant figures is enough. Therefore, sub-penny-ing should not be allowed until a stock is under, say $20 or $10. Then four figures can be obtained simply by adding tenths (mills).
Today, I traded a stock around $50. I noticed that occasionally the bid-ask spread was at least 5 cents. Does anybody really believe when I'm paying 5 cents in and 5 cents out that I'm interested in a so-called price improvement of a sub-penny? A mill? A tenth mill? No, far better for my order to go out at the mid-point and contribute toward closing the bid-ask spread Just listen to Groucho scoff at the so-called regulators
This also gives rise to an easy rule as to when sub-penny-ing might be considered, so long as sub-penny-ing is offer on an equal basis to all players. When a stock trades for a test period of, say one year never has a bid-ask spread of more than one cent, then it may be first sub-penny-ed by mills. Otherwise, all the bids and offers should be sent to the exchanges to truly improve the prices. (The TOS fiduciaries may be sincere, but I claim sincerely mistaken If this were not so, they'd allow trades from retail customers who asked to flow on through to truly improve prices)
Finally, we come to the issue of fair play. If I cannot place a limit order in sub-pennies, then why are others allowed to give me sub-penny prices? Very unfair indeed.
Further, when a fiduciary gives himself a cut of the trust money, he must report his interest, his split to his customer. Where's my report? How do I know what the TOS split was?
America was build on fair play. What are these so-called regulators thinking?
I'm very much opposed to sub-penny-ing because I see sub-penny-ing as a breach of fiduciary responsibility Totally unwise, unfair, indeed un-American If allowed to continue, customers should be granted full disclosure
Dr. Larry J. Paden
Bright Trading, LLC