The small-order execution system (SOES) was a system to facilitate clearing trades of low volume on NASDAQ

NASDAQ

The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...

. It has since be phased out and is no longer necessary.

Establishment

SOES was first introduced in December 1988 for 25 stocks.
The lack of liquidity after the 1987 market crash

Black Monday (1987)

In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...

 led NASDAQ to implement a mandatory system (since June 1988) to provide automatic order execution for individual traders with orders less than or equal to 1000 shares. (For stocks with low volume, it may be less than 200 shares). Market makers must accept SOES orders and so this provides excellent liquidity for smaller investors and traders.

Rules

There are several restrictions for those who use SOES, rather than a traditional Electronic Communication Network

Electronic Communication Network

An electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. The first ECN, Instinet, was created in 1969...

 (ECN), to place their orders.

1. Trades may not be in excess of 1000 shares for a particular stock.
2. SOES does not allow trades in stocks that are trading at prices greater than $250 per share.
3. Once a trader receives an execution through SOES, they must wait 10 minutes to place a trade on the same side of the market in the same stock.
4. Institutions and stock broker
   Stock broker
   A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
   
   s are not allowed to place orders for their own accounts through SOES, but they can for a client's account.
5. Market makers must honor their advertised bid
   Bid price
   A bid price is the highest price that a buyer is willing to pay for a good. It is usually referred to simply as the "bid."In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference between the two is called the bid/ask spread.An unsolicited bid or purchase...
   
   /ask price
   Ask price
   Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states she or he will accept for a good....
   
   s to SOES orders, provided that they are for the amount that the market maker is looking for.

Initial reactions

Initially, when SOES was mandatory, it was met with heavy pessimism from NASDAQ member firms because it forced them to execute all SOES trades that met the market maker's advertised price. There were also significant limitations implemented to prevent day trader

Day trader

A day trader is a trader who buys and sells financial instruments within the same trading day such that all positions will usually be closed before the market close of the trading day. This trading style is called day trading...

s from exploiting the system and taking advantage of old prices quoted by market makers.

Impact

SOES has revamped the trading market for individual investors. It has given small investors and traders the opportunity to compete on a level playing field with larger investors such as institutions for access to orders and execution.