The Trading Profits of SOES Bandits

Abstract:     
SOES bandits are individual investors who day-trade primarily through Nasdaq's Small Order Execution System (SOES). They attempt to predict short-term price movements of Nasdaq stocks by observing trades and changes in market maker quotes. We find that they usually hold positions for only a few minutes and usually trade profitably. They do not exploit single market makers who have failed to update quotes, but usually trade before the majority of dealers change quotes. It is intersting that SOES bandits trade profitably against dealers who have as much or more information. We attribute this to the greater incentives of the bandits. Market makers are trading with the firm's money while SOES bandits are trading with their own.

Note: This is a description of the paper and is not the actual abstract.

JEL Classification: G12, G14

Accepted Paper Series