What follows is a general description of the various markets and networks that myTrack uses to route your order for execution. Once you understand how these markets operate, you will be in a better position to appreciate how myTrack endeavors to route your order to the best possible market.  In addition, you will be able to better direct myTrack to do what you want.

myTrack routes to primarily six (6) markets/networks:

1. The Island ECN (INET)
2. SelectNet
3. BRUT ECN
4. Knight/Trimark Group
5. Schwab Capital Markets (Mayer & Schweitzer)

Chapters 2-4 will describe these markets.

Chapter 5 will detail how myTrack uses these markets for optimum routing

Chapter 6 has a quiz to allow you to gauge your understanding.

We are assuming you know how to read a NASDAQ Level II display.

If not, please click here for a tutorial.

2. The Island ECN

The Island ECN (INET) is an electronic order book that receives bids and offers and manages, ranks and displays them. For the immediate discussion, it would help to think of it as a vehicle to post your bids and asks and NOT for an execution. (We will see shortly that it will also "match" or "execute" as well). It cannot accept an order if that order will result in a "crossed market". By that we mean that in a normal market the bid is always less than the ask. Hence, if you submit a bid that is equal to or higher than the current ask price in the market (not just the Island book), Island will reject that order since it would result in a "crossed market".

We can best illustrate how it works by some examples:

Example 1:

MSFT

The inside market is 93.5 - 93.75 5x10.

Let’s assume you want to buy MSFT. You can submit a bid up to the price of 93.75 (higher than that would be equal or greater than the ask and would be rejected). Let’s say you enter an order to buy 800 shares at 93.625 the result would be:

The inside market is 93.625 - 93.75 8x10.

Note how powerful you are. You have changed the inside quote and your bid is now being displayed to the whole world. In fact no one should be able to sell MSFT at 93.5 or lower without first selling to you at 93.625.

Back to example 1 - Let’s say you want to buy 400 shares at 93.125 the result would be:

The inside market is 93.5 - 93.75 5x10 - not changed.

Not quite as powerful but your bid is up there for all to see.   Let’s say your friend now enters an order to buy 1000 MSFT at 93.  The resulting display will not change since INET has your bid at 93.125 which is higher than your friend. INET has not lost your friend’s bid - it simply will not display it until your bid is filled and then it will display it.

Back to example 1 - Let’s address the most common misunderstanding. MASH (a market maker) is shown as offering to sell 1000 shares at 93.75.   Why can’t I route an order to INET to buy 800 shares at 93.75 - why can’t INET go to MASH and execute the order for me?  The answer is that INET is not an executing network it is an order entry and matching service. An ECN is not designed to execute outside its own book. It will execute (or match) orders only on it’s own book.

So far we have described how orders are accepted by INET without any executions. Let’s now talk about executions via INET. The key to understand when INET will execute is that it will only do so if there is a match on its own book.

Example 2:

MSFT

The inside market is 93.5 - 93.75 5x10.

You want to sell 400 shares at 93.5.  This order will lead to an execution since it can match a bid posted by INET

The resulting display will be:

The inside market is 93.5 - 93.75 1x10.

You want to buy 500 shares at 93.75.  This will be rejected since INET is not offering at that price and it cannot match and hence lead to a crossed market.  However if you want to buy 500 shares at 93.875 this will lead to an execution since it can match an INET order.

The resulting display will be:

The inside market is 93.5 - 93.75 1x10 - no change.

In summary, the best way to think of Island is as a place to send buy and sell orders so that they get reflected on the Nasdaq Level II display. If the order matches a previous order on the INET book, it will lead to an execution.

3. SelectNet

SelectNet is a fairly sophisticated network operated by NASDAQ.   It has a multitude of functionality, but at myTrack we route to it for its basic execution capability. It allows us to "match" an existing bid or ask of a Market Maker (or an ECN) and get an immediate execution.  NOTE: The Market Maker does not HAVE TO fill your order. He can "decline".

It is a good complement to the Island ECN, since most of the time we send non-executing orders to Island for display and subsequent executions and we send orders for immediate executions to SelectNet.

Let’s do an example.

Example 3:

MSFT

The inside market is 93.5 - 93.75 5x10.

You want to buy 600 shares at 93.75. Your order will be sent to MASH.  If you get filled the display will look like this:

The inside market is 93.5 - 93.75 5x4.

However, if the market is moving up and by the time your order has arrived at MASH, either another buyer bought from MASH or MASH changed his market - your order will be declined.  To repeat - the same order if it was sent to Island it would have been rejected. Sending it to SelectNet will probably get an execution.

In summary, SelectNet is the vehicle for sending an order to a market maker for execution.

This chapter will build on your understanding of the routing mechanism and describe how myTrack utilizes the various venues to route your order to the best possible market. (Island ECN, SelectNet and GSCO are used as examples.)

But first let’s go back and plug some holes. In the discussion of Island & SelectNet we did not mention that they are strictly (as of this date) a market for NASDAQ stocks. In addition, mytrack only routes to them the most common order type. Hence the following orders will not be considered for routing to Island or SelectNet and will go directly to GSCO:

1. Non-Nasdaq stock
2. Order quantity greater than 10,000
3. GTC (not day order)
4. Condition is AON or FOK

Quantity less than 100 shares will be routed to Island but not to SelectNet.  Also if SelectNet is chosen and the market maker to send to happens to be GSCO, then the order would be routed to GSCO directly and not via SelectNet (no need for the additional step).

When myTrack gets your order, it goes through the following steps:

1. Is it eligible to be routed to Island or SelectNet ? If not (see above), it gets routed to GSCO.
2. Can it be executed on Island? If yes, it is routed to Island for an execution.
3. Can it be executed by a Market Maker via SelectNet ? If yes it will be routed to SelectNet.
4. If the above cannot be done - it will be routed to Island for inclusion in its book and display to the world.

5. Quiz

The following quiz will test your knowledge of the above material.   Be careful some of the questions are very tricky. The answers can be found at the end of the questions.

You have to figure out where the order will be routed. So the answer to every question is one of the following three (3) choices:

1. GSCO
2. INET
3. SelectNet

Example 5:

MSFT

All the questions are based on the above example.

1. Buy 2000 shares of MSFT at 93.625
2. Buy 500 shares of MSFT at 93.75
3. Buy 1200 shares of MSFT at 93.75
4. Buy 2000 shares of MSFT at 93.875
5. Sell 1200 shares of MSFT at 93.625
6. Sell 5000 shares of MSFT at 94
7. Sell 2000 shares of MSFT at Market
8. Sell 12,000 shares of MSFT at 93.625
9. Sell 800 shares of MSFT at 93.25
10. Sell 500 shares of MSFT at 93.5
11. Sell 2000 shares of AOL at 102
12. Buy 500 shares of MSFT at 93.875
13. Buy 50 shares of MSFT at 93.75
14. Buy 50 shares of MSFT at 93.625
15. Buy 100 shares of MSFT at 93 Good till Cancel
16. Buy 1000 shares of DELL at 43
17. Buy 500 shares of MSFT at 93.5

Answers:

1. INET - it is less than the best offer.
2. SelectNet - it will be routed to the mkt maker MASH for execution
3. GSCO - 1200 is more than MASH is offering.
4. SelectNet - will be routed to INCA for execution.
5. INET - it is greater than the best bid
6. INET
7. GSCO - all market orders go to GSCO
8. GSCO - all orders over 10,000 shares go to GSCO
9. INET for immediate execution
10. GSCO - it would have gone to SelectNet, but since it would havebeen routed to GSCO market maker - we send it directly to GSCO
11. GSCO - all NYSE orders go to GSCO
12. SelectNet - for routing to MASH - hopefully will fill you at the betterprice of 93.75 - but don’t bet on it.
13. GSCO - can’t go to SelecNet since quantity is less than 100
14. INET - but will not be displayed since it is less than 100 shares
15. GSCO - all GTC orders are routed to GSCO
16. Unknown - not enough information given.
17. INET

Score