Small Trades Drain Liquidity

The National Association of Securities Dealers says heavy use of a trading system designed to help individual investors is instead hurting them by limiting the number of brokerage firms willing to quote prices for Nasdaq stocks.

The NASD has for years been asking the Securities and Exchange Commission to curtail what it charges are abuses of the Small Order Execution System (SOES), an electronic means of filling orders of up to 1,000 shares.

In its latest salvo, the NASD provided evidence it claims shows brisk trading on SOES has led some brokerages to stop trading some stocks on the Nasdaq Stock Market, the world’s largest screen-based equity market.

When fewer firms are willing to trade a stock, market liquidity evaporates, forcing investors may pay more when they buy and receive less when they sell.

NASD is asking the SEC to consider reducing the number of shares that can be traded over SOES to 500.

The NASD said SOES volume as a percentage of Nasdaq share volume has risen to about 7.75 percent from about 2 percent in late March, when the SEC allowed previously imposed limits on SOES trading to lapse.