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30 November 2011

Taking Advantage of the Retail Investor?

OTC market maker takes nine points from a retail investor.

A new exchange traded note started trading today, the ETRACS Fisher-Gartman Risk-On ETN under ticker symbol ONN.

New issues often lack liquidity as few market making participants jump in to make markets right away. The issue opened for trading at $24 and bounced around between $22 and $27 in early trade. Then at 09:51:42  a.m. EST, sell-side liquidity vanished for a split second showing the best offer at $35. 

Over-the-counter market makers (aka internalizers) are allowed to print retail market orders anywhere within the spread. When the national best offer flashed $35 for a split second, some quick internalization program printed a retail market buy order up at $34.968. The stock immediately traded back down to $26, allowing the OTC market maker to cover for a quick nine points. The poor retail investor who sent that market order immediately lost the nine points.

Here is the trade sequence:


Time Last Size (00s)
09:51:21 25.74 1
09:51:27 25.73 2
09:51:31 25.74 3
09:51:32 25.74 2
09:51:32 25.74 1
09:51:42 25.75 1
09:51:42 34.968 1
09:51:46 26.00 1
09:51:52 25.76 2
09:51:53 25.76 1
09:51:54 25.76 1


If that retail investor’s buy order had been sent to any exchange, it most likely would have been executed at a much better price (as there is often hidden liquidity on the exchanges). But because OTC market makers are not required to send orders to exchanges, they were able to take advantage of the temporarily widened spread at the expense of the little guy again.

The Securities and Exchange Commission needs to investigate instances like this and determine whether some of these OTC market makers are really giving best execution or simply taking advantage of a retail trader's blank check.

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5 Comments to "Taking Advantage of the Retail Investor?":
  • Missing

    01 December 2011

    Are there no price collars around ETNs? OTC instruments? How can you be sure it was a retail trader that got scalped? The size? The sequnce is rather ironic no? High risk on a risk attenuating ETN?

  • Comment_dick__dennis

    01 December 2011


    No price collars on this instrument.  If I had only been looking at the tape, this would not have been enough information to jump to these conclusions.  However, at the time of the trade, Gartman and Fisher were on CNBC talking about this new issue.  So I brought up the ETN, and happen to be watching it.  Thats why I was able to notice the offer flash to 35 for a split second.  So the trade was inside the NBBO, which makes the trade perfectly legal, and not erroneous.  However, it clearly wasn't a fair price given to the investor who bought the stock up there.  

  • Missing

    02 December 2011

    this is criminal.  the broker for the buyer took advantage of their own customer.  this is a breach of their fudiciary duty to the customer.

  • Missing

    04 December 2011

    well, i am a tdameritrade customer and this has happened to me about once or twice a year.  i just didn't know i could protest if this happened.  it happened as recently as a month or two ago. there was no adjustment made to my account either.

  • Missing

    04 December 2011

    i usually use limit orders, but sometimes place an order at a higher price than the ask if i think the order at the ask is smaller than what i want to buy.  but this same circumstance (as described in this essay) has happened to me a few times a year. i did protest once (some years ago) but the tdameritrade person said that i had put in a higher bid and it filled at that price so there was no problem as far as they were concerned - they filled my order at the limit price.

    i don't place orders at market most of the time, and never when i am buying.

    but i just thought i would tell you that the "monitoring" has not caught any of the snafus with my account.

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