Mark Dupee Chats With Rogan Labier

Without the right frame of reference, trading stocks with direct-access execution tools can be “like running through a jungle blindfolded,” reducing gains or turning profits into losses. Who better to learn from than the best traders and market makers who make their living exploiting Level II and order-routing systems? Rogan Labier is a former Nasdaq market maker who knows the execution tools cold: how to buy at the bid and sell at the offer more quickly than the market makers themselves; how to tell if they are faking; how to read the “Axe;” and how to route your order for the most effective execution in difficult market conditions. Mr. Labier is also author of The Nasdaq Traders Toolkit, the first book to explain the use of Level ll and the execution routes in depth.

In this interview with Futures Editor Marc Dupee, Labier discusses the major execution tools, trading platforms, market maker fake outs, and lessons he’s culled from the hard-knocks school of direct-access trading.

Dupee: By way of summary for traders who may not know, can you provide a summary of what the major execution tools are, why they are important, and generally, when to use each; a big-picture overview — we’ll get to the nuances later. Let’s start with what is the definition of an ECN?

Labier: An ECN is an Electronic Communication Network. They were established back in ’97. Basically, an ECN allows an individual, via a broker, to place bids or offers that will show up in the Nasdaq quotes montage and allow for third parties to execute against them. So in other words, you can bid and offer in the Nasdaq with an ECN.

However, there are some ECNs that do a lot more than that, e.g., Archipelago (ARCA), REDI (Speer, Leeds, and Kellog) and Attain (ATTN). These are what I call active ECNs. Active means that they are not simply passive. You are not limited to simply bidding or offering with those ECNs. With them, you can place an order and the ECN will work your order in the montage using various execution routes, seeking the best price.

Now, the different Active ECNs have different setups as far as which routes they use first. But the basic idea is that they will go ahead — like a great big dragnet into the Nasdaq — and work your order for you via the direct connections with the ECNs, or via SelectNet to the other ECNs if they don’t have a direct connection. They’ll also use SelectNet to go out to market makers.

Dupee: Could you define “market systems” as an execution tool?

Labier: Market systems are run by Nasdaq. Basically, there are two at this point. There is SOES, the Small Order Execution System. And there is SelectNet, which is a delivery system. The difference is this: SOES will provide an automatic execution at electronic speed against the market maker. All things being equal, by the time your finger has hit the bottom of the key pad, the market maker on the other side of the trade is going to be presented with an execution.

In other words, with SOES he’s not going to have a choice of whether to execute the order or not. He’s simply going to receive an execution, which I like. However, SOES won’t work against ECNs. So if you try to use SOES against an ECN, you are going to get nothing done.

SelectNet, on the other hand, is a very different system: It is an order delivery system. The way it works, essentially, is like an instant messaging system which will deliver a message to a market maker (or the market at large, if you choose to “broadcast” the order) . If you decide to send one to a specific market maker, you can. It is called a “preference” order. So you can send a message that goes directly to a specific market participant, and him alone, or you can use a broadcast order that goes out to all market participants that have an interest in that stock.

Now, if you were sending a preference order to a market maker who is bidding the stock and showing a quote, he’s obligated to fill the size of that quote. However, he has 30 seconds to respond to your SelectNet preference order. And that is a very important distinction because if you are to SelectNet preference an ECN, as opposed to a market maker, you’ll have a different result. ECNs are electronic — there are no humans on the other side — and so the execution will happen at electronic speed.

However, if you send the preference to a market maker, he’s got 30 seconds to respond to that preference. He can respond by either accepting the order and filling it in full, or partialing it, or just declining it altogether, depending on how much stock he’s already traded at that point relative to his obligation. Thirty seconds can be a long time to wait, only to find out that your order has been declined.

Dupee: And could you please give an overview of exchange facilities?

Labier: Exchange facilities are like the NYSE, which has a facility called SuperDot. And interestingly, SuperDot recently (in late December 2000) introduced a new electronic facility called NYSE Direct. What this does, essentially, is if up to 1,099 shares are offered or bid — in other words, if the order you are placing is marketable and fits that criterion — the order may be entered into the system as an “electronic only” order. That’s going to execute automatically against that bid or that offer and not even go into the specialist book. If you have additional stocks beyond what can be executed or if you have a limit order, for example, that cannot be executed or is only partially executed, the rest of your order is going to go into the specialist’s book and remain there until done.

The cool thing about NYSE Direct is that you don’t have to do anything in order to designate your order as “direct,” because your brokerage house, dealing through its affiliated member of the New York Stock Exchange, will take care of that automatically. What happens when you place an order via SuperDot is the order really gets sent to that member, who then presents the order to the floor. When that member receives your order — and this happens at electronic speed if it can be executed — it’s automatically going to get that “direct” modifier. So you don’t have to do anything in order to take advantage of the new NYSE Direct system. You can take advantage of it simply by placing your order through a direct-access broker.

Dupee: Some very good traders I know still phone in their orders and don’t know the different execution tools and order routing that can be used to execute trades. They almost have the attitude of, “Why do I have to learn them?” What are your thoughts on that?

Labier: Well, here’s the thing. Stocks today move 2 or 3 points in two to three minutes. If you use the wrong route for the job, the wrong tool for the job, you could be out a lot of money. The bottom line is that if you are executing your own orders, you’ll need to know how the various routes work. If you manage to save yourself 10 cents on every order of 1000 shares, it adds up. But more importantly, you don’t want to leave money on the table due to simple misunderstandings. For example, and this is a very simple example — but you’d be surprised; even some traders who have been trading direct access for a couple of years don’t know this — SOES will not execute against an ECN. It will execute against a market maker — it will be an automatic execution — but SOES will not work at all against an ECN.

Let’s say an ECN is bid and you were to try and use SOES. You are going to get nothing done. So, you waste precious time. In the meantime, while you are trying to figure out what happened to your order, the stock keeps moving. Being that a lot of stocks move 1 or 2 points in one or two minutes, as I said, if you spend a couple of minutes trying to figure out why your order didn’t get executed, that can easily mean a couple points on a thousand shares, a couple thousand dollars. Now this is a very basic example, which most folks already know. There are many more arcane ones, like the uses of “hidden” ECN orders, and others.

The repercussions of not understanding how the execution systems work is dramatic. The thing is, up till now, there has just been nothing out there that has explained exactly how the routes work. Plenty of direct-access brokerages will sign you up and say, “Well, these routes work great.” And that’s it. Or “this route is best.” Why? But often that’s all they’ll tell you. Often, the brokers — who remember, are not traders themselves — don’t know. So the first thing that’s ever been out there about that was the Tools Of The Trade electronic book. I wrote about Level ll interpretation, when the various routes work and when they don’t work, and margin as it applies to active traders — all the stuff that they don’t tell you.

Dupee: When did you publish that on the Web?

Labier: Back in ’99, I guess.

Dupee: And the copyright of your Wiley book is 2000?

Labier: Well, the Wiley book is not The Tools of the Trade. It’s a different book. Wiley essentially bought the rights to it, but put out a hardcover book. The main difference is that it is professionally edited. I’m a trader not a writer. The Wiley book you’re speaking of, The Nasdaq Trader’s Toolkit, is the one that’s offered now. The electronic book The Tools of the Trade, is no longer offered. But The Nasdaq Trader’s Toolkit is a better read because editors have gone through it and corrected my horrible writing.

Dupee: I think it’s well written so I’m sure you did a good job there as well. But is everything from The Tools of the Trade in The Nasdaq Trader’s Toolkit?

Labier: Yes. At this point The Nasdaq Trader’s Toolkit even covers SuperSOES, which was supposed to have been released and which they keep pushing back. So The Nasdaq Trader’s Toolkit is probably going to remain in its current form for the next year. And by that time we’ll have a new version printed. So basically, yes, it’s absolutely 100% current and will be for the foreseeable future.

Dupee: How long would it take someone to learn direct access? I know it may be an intangible, but do you have an answer to that?

Labier: Yes. It’s a great question. In fact, that’s one of the most frequent questions I get. A lot of traders will write me and say, “I’m trading online. I have an account at ‘X’ online broker. I’m happy with them in every way except that I’m getting killed on execution. I want to start trading direct access, but I found out that there are all these different routes and you have to execute the orders yourself and I don’t know any of that stuff. How long is it going to take me to learn? And in the meantime, what is the learning curve going to cost me?”

Well, a lot of traders, including myself back in the day, jumped right in without knowing anything about the execution routes. And I can tell you the learning curve is fairly steep if you just wing it.

Dupee: Does that mean it takes a long time?

Labier: No, not at all. It’s not rocket science. But if there’s nobody to show you anything, if you just jump right in with nobody explaining anything to you and you have no reference point. Yeah, it’s kind of like running through a jungle, blindfolded. However, if you have someone to show you the ropes, or learn the information before you trade, before you put your money at risk, it really doesn’t take long. And there is no substitute for knowledge. There’s no reason to go through the learning cure by trial and error. It’s just that there are very few things out there that cover the subject in any kind of detail.

I train traders — both retail traders and traders at brokerages and institutions — on the execution systems. From two days to a couple of weeks is generally what it takes. And that’s it. And once you know the material, you are good to go. It doesn’t mean you are going to be a better trader by any means. But it does mean that you will be able to execute your trading plan with confidence.

Dupee: Do you mean that within two days to two weeks of having read the book, with actual practice, somebody can become proficient —

Labier: In order execution?

Dupee: In order execution by using a direct-access platform?

Labier: Absolutely. Like I say, it’s not rocket science; but it’s not intuitive either. And the best trading plan in the world is worthless if you can’t execute it. So once you learn the execution (which is not very difficult), then you obviously have to learn the particular functionalities of whatever software program you’re using. But the execution is similar no matter what platform you use. Some platforms will have more functionality than others (like some allow “hidden orders” and such). But once you’ve learned it once, you won’t forget. It really doesn’t matter whether you’re using one software platform or another, because the routes are the same. But you will have to learn the actual workings of the platform you are using as well. And that itself sometimes takes a little time.

Dupee: Are some platforms better than others?

Labier: Yes. Nowadays, there are many platforms out there, built for many different purposes. For example, there’s an excellent platform called Watcher. It is an extremely fast platform that does not contain a tremendous amount of functionality. However, the way it is set up for executions, it is just lightning fast and maybe quotes come faster through it than through certain other programs. However, it does not have tremendous charting functionalities, or studies, and other things.

Other platforms way on the other side have tremendous features and functionality, all the bells and whistles. You can do a gazillion studies, you can look at charts and every different color you can imagine. You can do all kinds of things on those platforms and they have much more sophisticated order entry capabilities as well. For example, with RealTick’s conditional orders, you can raise or lower the price of your order without incurring additional commissions. You can do all sorts of things on it that you can’t on other platforms. However, it’s a much larger program than the other.

Where in the case of Watcher you may get people who use scalping as an m.o. and are interested in unbridled speed and speed alone and they don’t look at charts, they don’t need any of that stuff, they’re trading 500 times a day. And on the other end you’ve got highly technical traders who really need to have a full comprehension of what’s going on in the marketplace and they are looking at sophisticated studies and other indicators. Those guys are going to be very well suited to a program like RealTick. So you’ve got the whole gamut of programs and platforms out there.

What you’ve got to do really is know what your trading plan is and then go out there and get the right software that is particularly suited to it. And these two programs are really the tip of the iceberg; there are platforms that just do execution – and don’t even have Level II quotes, as well as platforms that have every conceivable option. You’ve really got a choice in today’s market. The key is to identify your needs and find a platform that matches your needs.

Dupee: That makes sense. Let’s try to think of some examples. For instance, in a fast market, what’s the best way to get out of, or into, a fast-moving stock?

Labier: Well, that’s a $64,000 question. And this is a question I get, believe it or not, from guys that I’ve talked to for a while about all the different routes and how all the different routes work and they kind of raise their hand and go, “Well, which one works best?” And the point is that no route works best in all situations. You’ve really got to look at the specific situations of who is on the bid, who is on the offer, what are the market conditions, what’s going on in Level II. Once you have an understanding of exactly how the routes work and exactly how Level II figures into that equation, you are going to know from a glance at Level II what route is going to get you in or out quickest. But it’s really situation specific; that’s why learning how all the routes work is important.

Dupee: Is there an example that comes to mind about one thing that you might see on Level II that would say, “Hey, I need to route my order a particular way”?

Labier: Yes, every time I look at Level II, really. For example, if you were using an active ECN, let’s say Archipelago, for example, an active ECN that utilizes its direct connections to other ECNs, it would use SelectNet to go out to other ECNs and market makers as well.

Let’s say we have a situation where there were six ECNs on the bid each for 200 shares and you have a thousand shares to go. If you were to use SelectNet to go out to each of those separate ECNs individually, well, not only are you incurring a separate commission charge each time you go out to them, but it takes some time to actually punch that in and you might miss some of it.

Now, if you were to use something like an active ECN like Archipelago, or REDI, or even a platform-based auto-route that is configured to work like an active ECN, in that case, keep in mind that Archipelago goes out to the ECN via its direct connections and then it’s going to use SelectNet to preference other ECNs it does not have direct connections to. You’ve got to remember that a SelectNet preference against an ECN is an execution at electronic speed. So in other words, if there are all ECNs on the bid, you are going to find that you get a lightning fast execution by using an active ECN. However, if there are all market makers on the bid, you are going to find yourself potentially hobbled by using that an active ECN.

So you’ve really got to be able to examine the situation and see what you are working with. In the case I mentioned, those six ECNs had 200 shares each, none of them has enough stock to do your whole order of 1,000 shares. However, if you were to use an active ECN and place your order for 1,000 shares, it’s going to go out and hit all those bids and you are probably going to get done. It’s not going to cost any extra commissions, but it’s going to execute against multiple participants.

Dupee: What about if there were, as you said, six market makers on the bid, what would be the best way to execute it in that situation?

Labier: Depends what your order is, how many shares do they have vs. how many shares you have, who’s the “Axe” (the major player who can greatly influence a stock’s movement), etc.

Dupee: Say there’s no determinable Axe and they’re dangling 200 shares each —

Labier: Once you have an understanding of exactly how all of the different routes work, you’re going to know immediately from looking at Level II. Level II is like a map. And once you know how the routes work, you are going to know which route gets you to your fill quickest just from looking at that map. You’ll get a sense from Level ll of who’s active in the stock, and who doesn’t really want to trade size, even though they are there.

Dupee: What happens when the stock is just totally tanking and somebody wants to get out?

Labier: It’s a bad situation. There is no magic solution. You’ve got everybody in the world trying to get out and there’s nobody buying. Well, you are going to have a hard time. You’ll have to fight for it, and see who is there and what route will get you done quickest in an environment that changes right before your eyes. This happens to every trader; and the best you can do is be prepared.

But given that situation, there are any number of different ways that you might want to get out, depending who is on the bid. It is going to be tough if the market is tanking and there’s an overwhelming amount of supply and very little demand and you are elbow-to-elbow with a million other traders trying to get out at the same time and there’s only 200 shares bid.

The thing to do – obviously this is more easily said than done — is to get out before that tanking occurs (and) to be watching Level II, watching for the signs, making sure you are always protected, making sure that there are enough shares there for you to get out if you need to. And be ready, watching for signs of a change. If the situation turns, you need to be able to execute and get out as quickly as possible. If your outlook is not so short-term, or you aren’t always watching the market, always consider using the protection of stop loss orders.

Dupee: Will you sometimes undercut the price in order to bail out early in such a tanking situation?

Labier: You’re asking me if I’ll go to a lower price?

Dupee: Yes.

Labier: Absolutely. Why not? Sometimes I’d rather lose 25 cents right away and be done, rather than risk getting caught if things were to turn. Particularly last year this was the case when you had stocks that were priced at much higher valuations. You’re talking like $200 stocks and some of them moved 20 to 30 points in a day, obviously in a matter of seconds those things could drop numerous points. In those cases, you would have to be real careful and be watching and be ready. And as soon as it starts – hopefully before it starts to drop hard — you get yourself out.

Dupee: This, of course, doesn’t happen now because we’re not seeing the valuations as high as when the Internet and some of the tech stocks were up at the very highs. But, for instance, one day when Qualcomm hit about 700, it dropped as many as 50 or 70 points in one day. Did you happen to see that or trade that?

Labier: Yes, and there are any number of those kinds of situations. I had a friend who — a couple of years ago, if you remember ^ONSL^, one day it went from like $46 to $108 — he placed a market order to buy at like $97, and he wound up getting done at $106 because there were a lot of people buying it.

It was the wrong kind of order to place at the wrong time. The next day, it dropped, like, 60 points in 12 minutes. How do you get out when a stock is dropping 60 points in 12 minutes? Well, it ain’t pretty. That’s just the reality.

I’d love to say it’s easy in those tremendously strained situations that do occur from time to time, but once you get into what I call a crazy market situation — which I kind of define in the book — it’s really tough. You’ve really got to understand everything there is to know about execution at an intuitive response level in order to get done quickly.

Dupee: When we were talking the other day, you mentioned that some of your losing trades have been some of your most educational. Do any come to mind?

Labier: Absolutely. One is that time I told you about with the six ECNs on the bid. Well, what happened was I was in Microsoft and had like 10,000 shares and was watching the market really carefully, waiting for a situation like that to occur, waiting for a bunch of ECNs to line up.

Dupee: So you had Microsoft, and you had six ECNs?

Labier: Well, no. The ECNs weren’t there. I had a lot of shares to go and it was one of the situations where bids and offers were changing faster than you can really execute against. So I got an order ready on an active ECN and I waited until I saw a bunch of ECNs appear. Then all of a sudden, there were a bunch of ECNs on the offer and I hit the button. You know, just reaction. I saw all these ECNs and boom! And I got executed on all 10,000 shares within several seconds, probably six seconds. The problem was that I meant to sell, not buy. And I saw these ECNs line up there and just like the dog catching the cat — boom!

Dupee: You pressed the wrong button.

Labier: And it was probably one of the more stupid things I’ve ever done. And certainly in retrospect it educates you. If you’re a real masochist, I highly recommend doing that. You know, if you just have like a really good day and you just want to really –

Dupee: Bring yourself down?

Labier: Yes, give yourself a problem by trying to hold up Microsoft. You know, go for it. I guarantee you will have pain as a result.

Dupee: I can imagine.

Labier: There’s a Japanese expression I’m trying to remember. Basically, it goes something to the effect that your wins don’t teach you anything except to do the same thing. However, your losses you must examine and so your real learning curve comes from examining your errors.

Dupee: You learn from pain. Any other painful stories you could share with us?

Labier: Boy, I probably got dozens. I’m one of these guys that once you get started talking about losses, I’ll bring up everything, even from 10 years ago. Ask me to talk about wins and money I make, I get superstitious about that. But I will talk about losses.

Dupee: How about another one that you learned from?

Labier: OK. Now this is embarrassing…There was this biotech a few years back that I traded. And I noticed this one market maker for days who seemed to be buying, buying, buying. There’s no news on this thing. Volume was spiking but the stock wasn’t really moving because there was somebody selling. I noticed the guy who was selling, stopped selling, so I just went and bought this damn thing because the buyer looked like he was still there. And the stock went from like 14 to 21 in a few minutes. And then I looked at the stock and I saw that it was a really interesting company and then news came out that they just won approval from the FDA for this particular thing they had.

So I thought, “Wow, well, this is a great stock, this is interesting stuff.” I had the ‘flu, I wasn’t really in my right mind. So I went in and loaded up all I could on it. I thought, “Gee, this is going to just keep going.” And then I basically sat in bed for three days with the worst cold I’d had in years. On the third day when I got out of bed finally and looked at the market, the thing was halved in price.

That taught me so many things; about turning a daytrade into an overnight trade, about just buying something without looking into it seriously; without really looking at the fundamentals. You get confused sometimes and do silly things. And that was a silly thing which hurt me back at that time. I don’t normally take shots like that. That was something of an aberration. Now the interesting thing was, that at the time I had a string of very profitable trades on the heels of one another. So I guess I was in that position where you’ve won a lot and you think, “Well, gee. Who cares?” And you get yourself into doing something you wouldn’t normally do just because – your trading has affected your psychology. Losses can affect your psychology, but so can wins. And this is something that a lot of people have to think about. I certainly did, and for a long time too.

Dupee: You got too cocky?

Labier: Absolutely. You can be affected both ways, by wins and losses, and both are equally dangerous.

Dupee: Is there another example that taught you something about how to better route your order and how to become a better electronic trader?

Labier: There are so many examples of that. You learn every trade. I mean I can’t really give you a specific thing where it was like a definite moment where I said, “Oh, SOES works against a market maker.” It’s just one of these kind of things.

Dupee: You used to be a market maker. What are some of the games that the market makers play and how can people identify when the Axe is trying to fake people out?

Labier: Really kind of just by observing the market. There’s the feeling out there among traders, particular newbies, that market makers are these evil ogres just waiting for retail traders, who will do anything to screw them out of their 200 shares. The reality is that’s not really the case. I’m in no way defending what they do. All I’m saying is that they are as aggressive in wanting to play the market as you are. That’s it. That’s all there is to it. Oh — well, that and that they sometimes have unlimited money behind them.

You will never be able to know for 100% certain what a market maker is doing. In fact, in many cases a market maker doesn’t know 100% what he’s doing. Here’s an example. Suppose a market maker is handling an order for an institution. Now, the institution has a million shares to go and they want to get rid of it as soon as possible. They are not going to give that million-share order to the market maker outright, because in doing so, the market maker would have more info than he needs in order to do the job. Institutions are very careful about giving out large bits of inside knowledge. They want to be sure not to tip their hand.

Obviously, to act with that knowledge would be a violation. But they are not going to give the market participant that knowledge because they don’t want to tip their hand — to anyone. They may give the market maker 30,000 shares to go. Once he’s done, give him another 30,000. See how the market is doing. Give him another 30,000 or not. Hold off till the next day. So the market maker even may not know the totality of what he’s working on. And he doesn’t necessarily want to know either.

Dupee: You say, just by observing, you can tell a fake out?

Labier: Like I said, you will never know 100% what a market maker is doing. There is no way to know. However, if you see a market maker consistently hopping on the bid and he’ll stay on the bid or he’ll run the stock up to 99 and a penny but no more, and then he drops off the bid and waits for the stock to come back in a little bit and then gets back on and runs it up to 99 and a penny. Well, if you’re watching this very carefully, you can begin to make some assumptions. One is that he may have an order to do which is a large order with a top price he’s willing to pay. And then suddenly he disappears from the bid and offers huge size at the best offered price, and Instinet appears bid just a little lower, showing 100 shares, but prints at his price are going off like crazy…Use that knowledge how you like.

Also, there’s a number of different functionalities on some of the software platforms that offer you clues as to who the Axe is, a quick view. One of them is on CyberCorp’s trading platforms. It’s called Hammer. Another on RealTick is called Number Best. Those little identifiers are going to clue you into who is trading a lot of stock on the day. And that can be very valuable information when it comes to execution.

Dupee: What is the status of SuperSOES and how do you think it will change trading?

Labier: Well, SuperSOES has been postponed so many times. It’s really frustrating. But it’s a really cool idea which should really make execution a lot easier. Unfortunately SuperSOES has been postponed until after decimalization is fully implemented. Now, there’s a date of April 9 for completion of the decimalization roll out but I don’t think there’s real reason to believe that they are not going to make that date. So I think we’re talking — if and when it gets introduced — probably not until the third quarter. But one hopes they do introduce it. And it would be wonderful if they were able to figure out a way that the ECNs could participate in it without getting killed by it.

Dupee: There’s too much risk for them, huh?

Labier: Basically, it’s the network latency issue, network lag. The Nasdaq’s network is probably one of the biggest, most efficient and fastest in the world. So it’s not Nasdaq’s fault. But there is this timing delay between the time an order is placed and the time the quote is disseminated out to the market participants at large. Now if you were an ECN and you signed up for SuperSOES (which would mean signing up to receive auto executions from the Nasdaq) you have a liability to your order in the Nasdaq.

In other words, SuperSOES can present you with an execution. You have no choice in deciding whether or not to accept it. You get presented with an execution. And by signing up for SuperSOES, you would be liable to accept that auto execution. That’s what auto ex is.

However, as an ECN, you also have direct connections to subscribers like other brokerage houses, other ECNs. And you are obligated to those executions as well. So now let’s say you are an ECN and you signed up for the SuperSOES and you have a lot of direct connections to other ECNs and brokerage houses, subscribers. You place a bid in the Nasdaq for “X” number of shares of ABCD stock. And at more or less the same moment, you are presented with an execution by your subscriber. So you go into the Nasdaq to cancel that bid that’s out there because you already filled it.

You go into the Nasdaq. But in that interim time, say a few milliseconds later or even one or two seconds later, you are presented with an execution from the Nasdaq on that order. Well, you are liable to accept both of those executions. Now you’ve got an erroneous position. If you look at the most actively traded stocks, which also tend to be the most volatile, you can see – and given that an ECN like Island trades millions of shares a day — that they would be opening themselves up to nearly unlimited exposure and liability were they to sign up for the program. So there are some real difficulties there that cannot be easily solved.

Dupee: Without the latency problem, is there any advantage for an ECN signing onto SuperSOES?

Labier: Participating in an auto execution is good, theoretically. The real issue that the ECNs have with SuperSOES is not just SuperSOES. There’s something else coming in on the horizon called SuperMontage. It’s a replacement for Level II. Within the SuperMontage structure, there is such a thing as an “unattributed order,” which is one that can be placed into the Nasdaq that is not attributed to any particular market participant.

In other words, it’s an anonymous order which essentially is what you are placing when you place an order with an ECN. Nobody knows who is behind it. When SuperMontage comes in, you will be able to place those unattributed orders through the Nasdaq. I think the ECNs were justifiably upset with Nasdaq for competing for their business. On the other hand – I’m no lawyer, but there’s case law to support the Nasdaq doing that because they are a marketplace. So it’s a complicated issue.

Dupee: When is SuperMontage supposed to come out?

Labier: I don’t know. Well, SuperSOES has to happen first. So it’s a ways away.

Dupee: Other than the ECNs not participating, how will SuperSOES change our trading?

Labier: Oh, theoretically – and let’s say if the ECNs were to participate, and that could somehow be managed — it would make things a lot easier. SuperSOES will execute your order against multiple market participants up to the size of your order and the size of your order can be up to 999,999 shares in Nasdaq national market stocks. So basically you can place any size order into the Nasdaq via SuperSOES and it’s going to auto-execute against multiple participants until it’s filled. So theoretically you just won’t have to know about how to operate all these different systems anymore, in order to execute in Nasdaq national market stocks. However, the way it’s set up.

Dupee: Only if the ECNs come on board — right?

Labier: Right. And they are not going to. Plus the way the system is set up, even if ECNs do come on board, SuperSOES will only work in Nasdaq national market stocks, not small caps. So you’ll still have to know SOES and SelectNet in order to execute against – in small cap stocks and against, say, ECNs and Nasdaq national market stock.

Dupee: Will there be SuperSOES without the ECNs, just against the market makers?

Labier: Regardless of how many ECNs decide to sign up and participate, I think they are going to release it. They are trying to figure out a way to make the system work more equitably so that everybody will want to participate.

Dupee: These are big hurdles to overcome.

Labier: Yes, but if they do, it’s really going to be fantastic. It’s a major upgrade, a necessary upgrade to legacy systems that will really improve execution for retail traders everywhere.

Dupee: Thank you for taking the time to share your expertise, Rogan.

Labier: Thanks for having me. It was enjoyable.