Watcher is a very powerful tool that is intended for serious traders. It is possible to buy or sell hundreds of thousands of dollars of stock by pressing a single key. You are responsible for every trade done on your Watcher, even if you didn't "mean" to do it. While we work day and night to make the Watcher the most powerful, reliable, fast, and secure program in the world, there are lots things we cannot be responsible for (like trucks that crash into MCI fiber optic lines or woodchucks who like to eat NASDAQ power cables.) In any case, fully automated trading is on the cutting edge of technology, and you must accept all the associated risks of equipment and software failures.

Furthermore, because we are always improving the Watcher software (sometimes new and improved versions come out daily), this manual could never be complete. It is intended only to give you a general idea of how the whole thing works and then to get you started.

Watcher lets you buy or sell NASDAQ stocks using either NASDAQ's Small Order Entry System (SOES) or SelectNet system. It also tracks any positions you might have, warns you of market activity concerning your positions or other stocks that you are watching, and gives you the latest quote and market maker movement information.

The Watcher screen consists of three areas: the bottom, middle, and top. The bottom area consists of three quote windows. The middle area provides messages on trades that you might be doing, or on market activity in stocks that you already have a position in. The top area lets you look at different pages of information. You can switch between pages by pressing the Function keys located on the top row of the keyboard.

Getting a quote

To get a quote on a stock, simply type the four or five letter stock symbol and press <Enter>. The quote will appear in the quote window that is highlighted by a yellow border. The quote shows you the:

• inside bid and ask prices,
• number of market makers at the bid and the ask,
• the stock's tier level (the maximum number of shares per SOES order)
• net change from yesterday's close based on the mean of the bid and the ask
• today's high and low prices

The quote areas show you the market makers who have the best bid and ask prices. Those with the best bid prices are listed on the left, and those with the best ask prices are listed on the right. Market makers who are on the inside bid and ask are listed in blue.

A "*" appears next to the market maker who most recently updated his quote.

An example quote area:

GEKA 99 x 99 ½ (3x1)

L 96 H 96 ½ -½ SM5

NQMS 99 TSCO 99 ½

COWN*99 GSCO 100

PIPR 99 HRZG 100

The above quote area shows a quote for a stock symbol GEKA. The up arrow indicates that the last bid tick was an uptick. The bid tick is important for short selling, which we will cover later. It shows that the inside market is

99 x 99 1/2 and that there are three market makers at the bid (NQMS, COWN, and PIPR) each willing to buy stock at 99. One market maker, (TSCO) is willing to sell at the ask of 99 1/2. COWN most recently updated his quote. This stock is an SM5 stock, which means we could, at most, buy or sell 500 shares per order on SOES. The average of the bid and the ask is 1/2 lower than the average of the bid and ask at yesterday's close.

You can watch three different stocks at the same time in the quote areas; however only one window is the active window. This active windows is highlighted by the yellow border. Pressing <Tab> or <Shift><Tab> will switch your active quote window. All order entry is done on the stock in your active quote window, so make sure you have selected the right window before trying to enter an order.

To get a quote on a different stock in the same quote window, just type the stock symbol and press <Enter>.

You can change the size of the quote window by typing

~LINES X

Where X is the number of display lines you want in your quote window. You can change this as often as you want. For example, if you want 7 lines in your quote window, type

~LINES 7

Don't forget the <space> before the number.

All order entry is done by holding down the <Shift> key and pressing a letter key, depending on the type of order you want to do. An order will always be entered on the stock in your active quote area.

SOES Orders

SOES is NASDAQ's Small Order Execution System. On SOES you, the customer, always buy stock at the ask or sell stock at the bid from a market maker. SOES orders are executed by NASDAQ on a first come, first serve basis in price order. Each market maker will have one order executed against him automatically every 15 seconds that he remains on the inside market.

Since SOES orders are executed automatically, they are a very powerful tool for getting executions that otherwise would be impossible by conventional methods (i.e. phone trades).

The maximum number of shares that can be executed in a single order is determined by NASDAQ on a stock by stock basis. Stocks break out into three SOES "tiers": 200 shares, 500 shares, and 1000 shares. For your reference, these are shown in the quote area as sm2, SM5 and SM10.

SOES provides very fast order entry for sales at the inside bid price and for buys at the inside ask price. SOES orders are entered immediately after you press the appropriate key. An entry message describing the order will appear in the middle area of the Watcher screen.

Since SOES orders are entered immediately, please make sure that the correct stock is highlighted in the quote window at the bottom of the screen.

Regular SOES orders are entered at or near the current bid or ask price. Regular SOES orders will either be executed or timed out after 10 seconds after 9:35 am. Before 9:35am, a SOES order will not be timed out for 30 seconds. Under normal circumstances, you will get either a "U R Out" message indicating that the order could not be executed, or an execution confirmation message in the middle area.

The Watcher has an additional feature that will automatically enter some SOES orders 1/8 away from the inside market in stocks that trade in quarters. Because SOES orders are executed in price priority order, this gives you an added advantage without any significant additional risk.

Monster Key™ SOES Orders

All SOES executions occur at the current inside bid or ask price, regardless of the limit price entered. Because SOES orders are executed in a time and price priority ranking, by entering a SOES order at a price away from the inside bid or ask price, you can give your order a higher priority. The order will still be executed at the inside bid or ask price. As long as the inside bid or ask remains the same between when you place your order and when it gets executed, placing a sell order below the best bid price or a buy order above the best ask price will get you a faster or more likely execution at the same price. NASDAQ permits SOES orders to be entered as much as 20% away from the current inside market. The Watcher can instantly compute the most advantageous price possible for a limit order that will pass NASDAQ's screening. This is called a Monster Key™ order. The risk is that if the inside bid or ask change, then your order may be executed at whatever the new inside bid or ask price is at the time of execution. This may in fact be exactly what you want.

Here is an example: stock ABCD is 10 3/4 bid. Terrible news comes out on the stock. You enter a Monster order to sell ABCD. The Watcher computes that 8 5/8 is the lowest possible limit price that will not be rejected by NASDAQ, so it enters a limit order to sell at 8 5/8. Since your limit is the lowest possible in the system, you will get the next available sale in ABCD. If you missed the 10 3/4 bids, you're order will remain in force, and likely be executed at new bid of 10 1/2.

Placing Monster orders offers a better chance of execution, at the risk of getting that execution at a worse price.

Monster orders are timed out after 21 seconds after 9:35am. Before 9:35am, they are timed out after 99 seconds.

SOES Outcomes

While SOES is the most powerful tool available to anyone to get executions on the NASDAQ stock market, not all SOES orders entered get executed. The total number of SOES executions available in a given stock at any moment depends on the number of market makers on the inside market and how long they stay there. If there are four market makers on the inside ask price in a stock, then there is the potential for four immediate buy executions on SOES. If you are one of the first four orders in the system, you will get an immediate execution against one of the market makers at the inside ask price. Only after each of the market makers at the ask price has executed an order does NASDAQ start queuing orders. Each market maker is given 15 seconds to update his market before another SOES order is executed against him. If he does not move after 15 seconds, the next order is taken out of the queue in price and time priority order. This means that the highest buy order is taken next. If several buy orders are queued at the same price, the one that was entered first is executed. This process continues until either all queued SOES orders are executed, or all market makers have moved their markets.

After you enter your SOES order, it is transmitted to NASDAQ. If your order is executed, you will see a message in your middle window telling you with whom you did the trade. Your positions on page one will also be automatically updated.

Once your order times out (10 seconds for normal orders, 21 seconds for Monster Key orders), we will send NASDAQ a message to cancel it. Usually NASDAQ will acknowledge the cancel and you will see a "you are out" message ("U R Out") in the middle window. This means that your order was canceled and can no longer be executed. You are free to reenter the order if you still want to do the trade.

It is also possible to get a "Too Late" message, which means that our cancel message reached NASDAQ after the order was already executed; hence too late to cancel. You should receive your execution soon.

Finally, you may see a "No Find" message. These messages almost always occur at the opening or when NASDAQ is having computer problems. The literal meaning is the NASDAQ was not able to find your order to cancel it; it is lost somewhere in their computer system. There is no way to know what the final outcome of the order will be except to sit back and wait. We will automatically continue to try to cancel your order periodically until you get back either an execution or a "U R Out".

"No Finds" can be a real problem. With a "No Find" message, you do not know the current status of your position. This is the reason that we enter all SOES orders before 9:35AM with extended time-outs. However, some traders are so frustrated by "No Finds" that they choose not to enter orders unless necessary when "No Finds" start showing up. Another strategy is to use Monster Key orders to close out positions during 'No Find" storms.

If you think that NASDAQ, the world's 2^nd largest stock market, should be able to fix such an incredible problem, you're right. Oh, well.

SelectNet Orders

SelectNet is NASDAQ's optional execution system that allows two parties to execute a trade at any mutually agreed price. While you can theoretically enter any SelectNet order, no one will execute that order unless they want to. SelectNet is a very useful tool because it gives you the opportunity to trade stock within or between the inside market, like buying stock on the bid when a stock is going down. With SOES you always pay the spread.

SelectNet orders can be placed at any price, and can be preferenced against any market maker or broadcast to all market makers. When you place a SelectNet order, text will appear on the top line of the Watcher screen. You can accept the default order price by pressing <Enter>, or you can modify it and press <Enter> when you are ready to place the order.

If you make a mistake or decide you do not want to place the order, pressing the <Esc> key in the upper left corner of your keyboard will clear the text.

After pressing one of the shift keys listed above, the top line of the Watcher screen will look something like:

$NB1000MSFT99 7/8

The "N" indicates a SelectNet order, the "B" means buy, followed by quantity, symbol, and price. Press <Enter> to enter the order, or press <Esc> to clear it. To modify the price, press the left or right arrow keys. This will move the price up or down by an eighth. Pressing the <Ctrl> key and a left or right arrow key will move the price by a sixteenth.

To place a preferenced order with SelectNet, type the market maker symbol after the price and press <Enter>.

SelectNet orders will automatically be canceled after one minute (three minutes for preferenced orders). If you want to cancel the order earlier than that, press function key F6, select the order you wish to cancel with the up and down arrow keys, and then press the "\" key (which is above the <Enter> key on most keyboards). Read section "SelectNet Orders page" for more details.

If you try to place a SelectNet order with a price outside the current marketplace that would be bad for you if executed, you may see a message in the middle screen area that says:

TRIED TO SELL STOCK AT OR BELOW THE BID. USE .O TO OVERRIDE

If you are certain that you want to place the order, just press ".O" and then the <ENTER> key.

Island Orders

Your Watcher also gives you a gateway to the fastest, fairest, most transparent and least expensive trading system in the world: Island. Island lets you place orders and view orders placed in a nationwide limit order book system. This means that anyone who uses the Island system can execute anyone else's order on Island. Compared to SelectNet where only Market Makers are given the privilege to take out orders, Island gives buyers and sellers the opportunity to directly meet with any middle man.

Every time you enter a SelectNet order using your Watcher, your order is automatically mirrored on the Island book. You will see your own orders just as others see them on the book.

You see orders that are on the Island book any time you hit up a quote. The Island orders appear in green at the top of the quote. They show the quantity and price of the best available Island orders. If you want to execute against one of these "greenees", the Watcher gives you keys to instantly enter a "takeout order". Island take out orders can be entered whenever an Island inside market is available. When you see a green quote listed on a stock, you can use one of the following keys:

Island take out orders are either executed immediately or cancelled.

Anytime an Island order that improved the inside market is entered in a stock that is on your ticker, you will see the new market in your ticker window in blue.

The top area of the Watcher screen lets you look at different pages of information, such as a list of your positions, or a scrolling stock ticker. The function keys across the top of the screen let you easily switch between pages. Simply press a function key to see a page.

Watching Your Positions with the Position Page…F1

This page shows an alphabetical list of your positions and stocks that you have put on your ticker. You can scroll through the list with the up and down arrow keys, PageUp, PageDown, Home, or End. This page will show you how many shares you are long or short the stock, the price you bought or sold it, and other information.

2000 GEKA 29 ½ 30 x 30 ½ (2x1) 12:21

For example, the above line on your Positions page tells you that you are have a 2000 shares of GEKA. You bought it at 29 ½, the current inside market is 30 x 30 ½, with 2 market makers at the inside bid and one at the inside ask price. The last tick in GEKA occurred at 12:21 pm.

Watching Stocks with the Ticker Page…F2

This page has two windows. The window on the left is called the "TID" and shows all inside market changes. The window on the right shows any market maker update in a stock that you have added to your Ticker list.

The Tid window shows stock price changes that affect the inside spread. A line in the Tid window looks like:

9:58:56 NSCP 99¼ x 99½ +¼

This tells you the time of the change, if the change is an uptick or downtick, the stock, the current inside spread, which side of the spread (either the bid or the ask) moved in which direction, and the net change.

Since the Tid window will show you any inside spread change on any of 7000+ NASDAQ stocks, it can become a very quickly moving window. There are two ways to modify which stocks appear in this window. One is to specify your default settings. This will let you eliminate an entire tier level, or specify the range of stock prices that you are interested in seeing in your TID window. For example, you could have tier 2 stocks (those that you can only trade in 200 share lots) eliminated for your Tid, see tier 5 stocks only if their bid price is above $5, and only see tier 10 stocks if their bid price is greater than $5 and their ask price is below $50. Since stock prices change, and since new stocks are added, these settings are used to refresh your Tid every day.

You can also remove stocks from your Tid individually. Just press the minus key, "-" , followed by the stock symbol. Typing -STOCK again will undelete the stock and make the stock appear in highlights. Typing -STOCK a third time will remove the highlighting, leaving you back where you started from.

The window on the right is your Ticker window. A line in the Ticker window looks like this:

PSIX (27 ¼ x 27 ½ ) (4x7) GSCO ticks down

This tells you the name of a stock, the bid tick, the inside market, the number of market makers on the inside bid and ask, and a brief text message that describes what a market maker did in the stock.

The Ticker window shows only stocks that you have added to your Ticker list. To add a stock in the active quote area to your Ticker list, press the "*" key, (<Shift> "8"). You will now see any market maker activity in that stock in the ticker window. To take a stock off your Ticker list, press "*" again.

You can have a stock highlighted in a different color in your Ticker window. This is useful for stocks that you want to pay special attention to. Use the "=" key to add or remove highlighted stocks to your Ticker.

If you want to see a list of the stocks that you have put on your Ticker list, press F10. The PageUp, PageDown, and up and down arrow keys can be used to scroll through the list.

To clear all of the stocks off of your ticker and start anew, you can type the ~CLEAR command.

SelectNet Orders Page…F6

This page lets you view the last few SelectNet orders. Canceled or expired orders are listed in red, pending orders in white, orders executed on SelectNet are green, and orders that were executed on Island are yellow. A pair of blinking pink down arrows tell you that there are more orders below the bottom of the screen. Press the end or down arrow key to view the new orders.

If you wish to cancel a pending SelectNet order, use the up or down arrow keys to select the pending order, and then press the "\" key. This key is located above the <Enter> key on most keyboards. You will see "*" appear next to the order type, and after a few seconds the white pending order will change to red, indicating the order has been canceled.

Use the <Alt><Tab> key to toggle you back and forth between the SelectNet order page and whichever page you were viewing previously.

Risers and Fallers Page…F3

This page lists stocks whose prices have changed the most for the day. Try not to stay on this page for very long because it can slow down your Watcher.

Locks Page…F4

This page shows stocks whose inside bid is equal to or above the ask price. Try not to stay on this page for very long because it can slow down your Watcher.

Report Page…F5

This page lets you examine reports on your trades. Use the up and down arrow keys to select the report you want to view (you can only view your own reports). Press F5 again to read the report. The up and down arrow, PageUp, and PageDown, Home and End keys can be used to scroll through the report.

To jump directly to your reports, you can type "?" followed by your initials and press enter. For example, typing "?JL" would jump me to the first report for trader JL. While you are viewing a report, you can search for a word by typing "?" followed by the word and pressing enter. For example, while viewing a dialy P&L report, I could type "?INTC" to jump to the first Intel trade on the report.

There is also a report called "Watcher News". This report has up to the minute information that you need to know about the Watcher program, NASDAQ rule changes, and the meaning of life. Read it every day.

Recap Page…F7

This will show you your most recently entered and executed orders. You can scroll using Up and Down arrows, Page Up & Page Down, or Home and End keys. Executions are green. To see all the trades in one stock in order, type ?STOCK and press enter while on page 7.

Message Page…F8

This will show the last few broadcast messages received. We send out broadcast messages to keep you up to date on late breaking news, like when NASDAQ is having computer problems that could affect you. When a new message comes in it will pop up to insure that you see it. Press F8 to clear the pop-up message window.

News Page…F9

This page shows you the latest headlines that concerned a NASDAQ stock. These headlines are compiled from several sources. If news appears on a stock for which you have an open position, you will get a message in the middle area on your Watcher screen. The news page will only show you the headline of the story.

Sometimes a news article will mention a stock, but the stock symbol will not appear in the headline. So do not be confused if your Watcher tells you that news came out on a stock, but you do not see the stock listed on the News Page.

The Five Minute Rule…. You can only perform a single SOES order in each stock per side of the market in a five minute period. If you buy ABCD on SOES, you must wait 5 minutes before buying it again. You can, however, sell ABCD on SOES provided that you have not sold it on SOES within the last five minutes. The Watcher will not let you enter an order that would violate this rule.

Short Sale Rule… You cannot short sell a stock at or below the bid if the last bid tick was a downtick. A downtick is defined by NASDAQ as the condition when the current bid is lower than the previous bid. The simplest way to tell if you can short sell a stock is to get a quote on it and look at the bid tick symbol just to the right of the stock symbol. If it is a down arrow, you cannot short sell the stock at or below the bid. The red down arrows and green up arrows in your Ticker window also tell you if the last movement was a downtick or uptick. A small green "s" in the bidtick field means that the stock is a NASDAQ "Small Cap" issue. The short sale rule does not apply to small cap stocks; you can short them at any time.

Market Maker Exclusion Rule… You cannot enter a SOES trade in any stock that your brokerage firm makes a market in. If you try to SOES in one of these stocks, you will get a message like NOTHING DONE, [MMID] MAKES IT. Don't worry, though, most SOES active firms only make a few stocks, and you probably wouldn't want to trade in them anyway.