SOES Banditry and NSE’s DMA

In the 1990s, SOES bandits were traders who used the Nasdaq Small Order Execution System(SOES) to submit orders designed to profit from very short-term price changes, similar to the generic scalping. The losers generally were the Nasdaq dealers who adjusted their quotes slower than few seconds. These high-speed trading strategies ultimately caused spreads to widen because dealers and other traders had to recover from other traders what they lost to the SOES bandits.

Nasdaq protected its dealers by restricting the access of bandits to the SOES system by classifying them as professional short-term traders. The issue is now forgotten, however, the new losers are public limit order traders. High frequency proprietary traders undoubtedly exploit these traders when prices change quickly, but unlike Nasdaq dealers these traders are not organized to complain about it.

NSE is considering providing Direct Market Access(DMA) and it will be worth watching how it protects the low end retail traders.