The Specialist’s Discretion: Stopped Orders and Price Improvement
Mark J. Ready, University of Wisconsin-Madison

When a market order arrives, the NYSE specialist can offer a $1/8 better price to gain priority over the limit orders on the book and to trade for his own account. Alternatively, the specialist can “stop” the market order, which means he guarantees execution at the current quote but provides the possibility of price improvement. Ready constructs a model which shows that specialists can use stops to sample the future order flow before making a commitment to trade. His empirical evidence demonstrates that both stops and immediate price improvement impose adverse selection costs on limit order traders. (Accepted Summer 1997.)