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Replies to post #221173 on NeoMedia Technologies, Inc (NEOM)
Sub-pennying
An abusive strategy that has been occurring with increased frequency is a practice called “sub-pennying”. It is the practice of a market participant stepping in front of a displayed limit order by 1/100ths of a penny (this practice is outlined in detail on my website, http://www.defendtrading.com).
SEC rule 612 prohibits market participants from displaying orders in a sub-penny increment. Most broker-dealers will not even accept these sub-penny orders from their customers. So brokers can’t accept order in sub pennies, but they can trade them. Huh? While I get mid point pricing, that does not explain all the 1/100th of a penny reports etc.
Broker-Dealer Internalization
However, broker-dealers themselves are exempt from SEC Rule 612, to provide “price improvement” to their customers. When an investor places a market order from their retail brokerage account, their broker-dealer routes this order to their OTC market maker. The market maker then decides if they want to trade against their customer, by taking the opposite side of the order. If the market maker believes they can make money by trading against their customer, they will fill the order from their own inventory. In this case, the market order never makes it to the public exchange. This practice is known as broker-dealer internalization.
