Executions on Small Caps

In June 1988, I began my career as a securities broker in New York. For 13 years, I had a very successful career as a broker. I primarily spent my career at 3 different firms on Wall Street.

With that said, I believe I understand Wall Street very well. The knowledge I gained was the direct result of 13 years in the trenches on Wall Street.

These days, I trade actively for my own account. Several times on a weekly basis, I get frustrated trading my account. The frustration stems from the execution of orders, especially in OTCBB and Pink Sheet stocks. It is important that I bring this to the attention of the "trading public".

Let's just say theoretically a stock is trading at 10 cents (bid) 12 cents (offer) to make it simple. If an order is given to a trader to sell 10,000 shares at the bid (in other words, the order is given with a limit of 10 cents), you will see that the market will probably change to 10 cents (bid) 11 cents (offer). If you immediately look at the Level 2, the firm now offering the stock out is probably the firm that the order was routed to if your broker dealer does not make a market in the stock. Put two or 3 orders in a row to sell the stock on the bid and you'll probably see the same firm go low offer on the stock. Let me say unequivocally that this practice should not be allowed and as far as we're concerned, the trader is not properly following the rules of execution. That trader has an obligation to sell the stock on the bid in a timely manner if the limit order is equivalent to the bid until either that bid price has dropped or your order is filled.

For a novice who may be reading this post, the significance is that the trader is affecting your ability to get an execution. Here is the rule. Put 2 or 3 orders in a row in to sell the stock. Watch the bid and offer carefully. If the offer drops and the same market maker is lowering the offer a few minutes after you have submitted your order each time, then that market maker is not following the rules and is affecting your ability to execute a trade. This only applies if your limit order is on the bid. Otherwise, the market maker is free to execute the order or as we say in the business, work the order. The same applies for buying a stock. If the stock is quoted 10 (bid) 12 (offer), then that market maker has an obligation to execute the order on the offer ( in this case, 12) if your limit order is 12. Many investors may think this is trivial but it is not. It is actually complicated and probably happens on a large percentage of orders in small stocks.