SOES Bandits: The 1989 Day Traders Who Revolutionized Nasdaq with Profits and Innovation
Discover the story of the SOES Bandits, pioneering individual investors who transformed Nasdaq day trading by exploiting the Small Order Execution System (SOES) after the 1987 crash, laying the foundation for modern high-frequency trading.
What Were the SOES Bandits?
The term 'SOES Bandits' refers to a group of savvy individual investors who, in the aftermath of the 1987 stock market crash, capitalized on the Nasdaq Small Order Execution System (SOES) to engage in rapid day trading. Their innovative strategies marked the earliest form of what today is recognized as high-frequency trading. Although each trade yielded modest profits, their strategy relied on executing dozens or even hundreds of trades weekly to accumulate substantial gains. They typically positioned themselves before market makers updated their quotes, then quickly sold at advantageous prices.
Interestingly, despite having less sophisticated information than professional market makers, SOES Bandits managed to profit consistently. Bearing both profits and losses themselves, these traders were highly motivated to outperform traditional market-making firms, demonstrating sharper trading acumen.
The Origins and Impact of SOES Bandits
The debate of human versus machine in trading traces back to the SOES Bandits story. The dramatic 1987 crash of the Dow Jones Industrial Average, known as Black Monday, saw a near 23% drop—the largest single-day plunge ever recorded. This turmoil caused many Nasdaq market makers to halt operations, leaving retail investors vulnerable.
Seizing this gap, a small group of investors exploited the SOES system’s automated, near-instant trade executions. SOES trades received execution priority, enabling these traders to rapidly enter and exit positions ahead of larger investors, generating significant profits from market inefficiencies.
Key Figures Behind the SOES Bandits
The pioneering SOES Bandits included Sheldon Maschler and Harvey Houtkin of Datek Securities. Alongside Jeff Citron and Josh Levine, they developed the software 'Watcher' in 1989, which exploited SOES’s slow price quote updates to gain an edge in day trading.
Though SOES was designed for small orders, Datek leveraged it for large-scale trades, buying and selling stocks within seconds. By 1996, Datek had grown to employ over 500 traders, many recruited from top Ivy League universities, highlighting the scale and sophistication of their operations.
Legacy and Evolution
Datek Securities’ success helped ignite the rise of Electronic Communications Networks (ECNs), such as Island and Archipelago. Archipelago eventually merged with the New York Stock Exchange in 2006, signaling a major shift in market structure influenced by early high-frequency trading pioneers like the SOES Bandits.
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