Small Order Execution System (SOES)

What Was the Small Order Execution System (SOES)?

The small order execution system (SOES) was a computer network that automatically executed trades in Nasdaq market securities and some Nasdaq small-cap securities. Nasdaq implemented this mandatory system as a result of a lack of liquidity following the 1987 stock market crash. SOES enabled individual investors to execute trades in fast-moving markets and gave them the same access to orders and execution as larger traders. 

SOES was crucial in automating markets for retail investors and greatly enhanced individuals' ability to become active day traders. The system has largely been phased out with the emergence of all-electronic trading that increased transaction speed at ever higher trading volumes.

Key Takeaways

  • The Small Order Execution System (SOES) was an automated system used on Nasdaq exchanges to allocate and execute retail orders by assigning fills to exchange member firms.
  • SOES allowed retail investors trading lots of less than 1,000 shares (for some less actively traded shares, the minimums may be 500 or 200 shares) to receive near-instant execution, even in fast markets.
  • The SOES system was famously exploited in the early 1990s by directing orders to SOES, professional traders could receive higher-priority execution on their orders,
  • Experts credit SOES with the rise of retail day trading and advancement in the automation of markets.

Understanding Small Order Execution Systems

SOES was first introduced in December 1984 for 25 stocks to provide automatic order execution for individual traders with orders less than or equal to 1,000 shares. When SOES became mandatory in late 1987, it initially faced heavy pessimism from Nasdaq member firms because it forced them to execute all SOES trades that met the market maker’s advertised price. Significant limitations were put in place in order to prevent day traders from exploiting the system and taking advantage of old prices quoted by market makers.

The legacy of SOES in the financial markets is that it essentially "leveled the playing field" and significantly improved liquidity for small-scale investors. It required market makers to accept SOES orders that matched their advertised bid and ask prices, and allowed individual traders to execute orders for stocks trading at no more than $250 per share. Institutions could not use SOES; neither could brokers trading in their own accounts, although they could use SOES to trade on behalf of small clients. Once a trader places an order through SOES, they must wait at least five minutes to place another trade on the same stock through SOES.

The use of this legacy system is no longer necessary since advances in computer and communications technology have made it possible for individual traders to conduct rapid, large trades on par with institutional traders. SOES now functions as a computerized linkup of Nasdaq market makers that allows orders of 1,000 shares or less (for some less actively traded shares, the minimums may be 500 or 200 shares) to bypass brokers and receive automatic execution at the best possible price.

SOES Bandits

SOES bandit is a slang term for traders who exploit the system by making rapid buy and sell orders in order to make a profit from small price changes. SOES bandits execute a small transaction on a security in order to manipulate the price and then execute a larger transaction to take advantage of the price inefficiency. Their average profit is small, but they can trade hundreds or even thousands of times per week. This is considered a form of insider trading since the person placing the order has advanced knowledge about the market’s probable movement that other market participants do not know.

Harvey Houtkin of All-Tech Direct Inc. became one of the best-known SOES bandits after winning a 1993 federal appeals court case that forced the Securities and Exchange Commission to allow wider access to SOES and publishing the 1998 book Secrets of the SOES Bandit.

Article Sources
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  1. Nasdaq. "Nasdaq: 50 Years of Market Innovation." Accessed May 10, 2021.

  2. GAO. "The Effects of SOES on the Nasdaq Market." Accessed May 10, 2021.

  3. Financial Industry Regulatory Authority. "Notice To Members 84-63 Small Order Execution System (SOES)." Accessed May 10, 2021.

  4. Govinfo. "Securities Market Operations: The Effects of SOES on the Nasdaq Market." Accessed Apr. 6, 2021.

  5. Harvey I. Houtkin (with David Waldman). "Secrets of the Soes Bandit: Harvey Houtkin Reveals His Battle-Tested Electronic Trading Techniques." McGraw-Hill, 1998.

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