Equity Order Types and Modifiers

The order types in this lesson come from the NYSE Arca equities order types rule, and several of its provisions are read against another instrument, including the intermarket sweep order against the national market system (NMS) definitions, the retail modifier against the trading ahead of customer orders rule, and the Directed Order against the two options rules, which give the name a different meaning.

The three groupings it draws on answer three different questions: where the order may not go, where it must go, and what has to be true before it trades.

What Is a Non-Routable Limit Order?

A Non-Routable Limit Order is a Limit Order that does not route. Two sentences then fix its behavior against an Away Market.

• It will not be displayed at a price that would lock or cross the PBO (PBB) of an Away Market, using the protected offer and protected bid that the national market system (NMS) definitions in Regulation NMS supply.
• One to buy (sell) will trade with orders to sell (buy) on the book priced equal to or below (above) that PBO (PBB).

The order can be designated to be cancelled if it would be displayed at a price other than its limit price for any reason. Where it is not so designated, any untraded quantity is re-priced in four steps. Those adjustments are measured in the security's minimum price variation (MPV).

The order may also be designated with a Non-Display Remove Modifier. So designated, it trades as the liquidity taker against an aggressing liquidity-adding order, in its plain or its midpoint version, whose working price equals its own working price, but not its display price.

In that last case the order will not be assigned a new working price or display price based on changes to the PBO (PBB). It has stopped following the Away Market.

Priority follows the gap between the two prices. A Non-Routable Limit Order with a working price different from the display price is ranked Priority 3 - Non-Display Orders; one with a working price equal to the display price is ranked Priority 2 - Display Orders.

Exam Tip: Gotchas

• The order's priority label moves with its own prices. The same order is a display order while the two prices agree and a non-display order the moment re-pricing separates them.
• Re-pricing stops once the limit price is clean. After the Away Market moves away from the limit price, the order takes its limit price for both prices and no longer tracks that quote.

How Does an ALO Order Add Liquidity?

An ALO Order, written out in the Arca options rule as a Liquidity Adding Order (ALO), is a Non-Routable Limit Order that, unless it receives price improvement, will not remove liquidity from the book.

Two designations are available, and one of them is exclusive.

• It can be designated to be cancelled if it would be displayed at a price other than its limit price for any reason.
• It can be designated as non-displayed, but if so designated may not also be designated as a Reserve Order.

An Aggressing ALO Order to buy (sell) will trade if its limit price crosses the working price of any displayed or non-displayed contra-side orders on the book priced equal to or below (above) the PBO (PBB) of an Away Market. In that case it trades as the liquidity taker with those orders.

Where the order is not designated to cancel, its untraded quantity is priced by what its limit price runs into.

An ALO Order to buy (sell) will not be assigned a working price or display price above (below) the limit price of such order.

Once resting on the book, the order is re-priced or trades, or both, in three cases.

• Where the Priority 2 - Display Orders contra-side order, or the Away PBO (PBB), re-prices higher (lower), the order trades or is priced under the same three branches above.
• Where that PBO (PBB) re-prices lower (higher) to be equal to or lower (higher) than its last display price, or its limit price no longer locks or crosses that quote, it is priced under the Non-Routable Limit Order branches.
• Where that PBO (PBB) re-prices lower (higher) than the working price of a non-displayed ALO Order, that order takes a working price equal to the PBO (PBB) of the Away Market.

Two closing sentences limit the type. An ALO Order will not trigger a contra-side Mid-Point Liquidity (MPL) Order that is resting at the midpoint to trade, except as the midpoint order's own subparagraph provides. And the ALO designation is ignored for an ALO Order that participates in an Auction.

Exam Tip: Gotchas

• A liquidity-adding order can still take liquidity. Where its limit price crosses the working price of book interest priced at or through the Away Market quote, it trades as the liquidity taker.
• The designation switches off inside an auction. An ALO Order that participates in an auction has its ALO designation ignored, so it behaves like any other auction participant there.

What Must an Intermarket Sweep Order Do to Trade Through a Protected Quote?

The equities rule defines an intermarket sweep order (ISO) as a Limit Order that does not route and meets the requirements of the intermarket sweep order definition in Regulation NMS.

An ISO may trade through a protected bid or offer, and will not be rejected or cancelled if it would lock, cross, or be marketable against an Away Market, provided that it meets both of the rule's requirements.

1. It is identified as an ISO in the manner prescribed by the Exchange; and
2. Simultaneously with the routing of an ISO to the Exchange, the entering firm, which the rule calls an ETP Holder, routes one or more additional Limit Orders, as necessary, to trade against the full displayed size of any protected bids (for sell orders) or protected offers (for buy orders) on Away Markets. Those additional routed orders must be identified as ISO.

The Regulation NMS definition the exchange rule incorporates carries two elements the rule's own sentence leaves out. The federal definition is confined to a limit order for an NMS stock, and its additional limit orders are routed against the full displayed size of any protected bid or offer with a price that is superior to the limit price of the order marked as an intermarket sweep order.

Exam Tip: Gotchas

• Marking the order alone earns nothing. The exception needs the marking and the simultaneous routing of the additional orders, and those additional orders must themselves be marked as sweep orders.
• The federal definition prices the additional orders, and the exchange rule's own sentence does not. Regulation NMS reaches protected quotations superior to the sweep order's limit price; the exchange rule's sentence names the full displayed size without that qualifier, though the rule still requires an ISO to meet the federal definition.

How Do the Day and Immediate-or-Cancel Sweep Orders Differ?

The time-in-force designation decides what happens to the remainder.

An ISO designated IOC, an IOC ISO, is immediately traded with contra-side interest in the book up to its full size and limit price, and the quantity not so traded is immediately and automatically cancelled.

An ISO designated Day, a Day ISO, is treated differently.

• If marketable on arrival, it is immediately traded with contra-side interest up to its full size and limit price.
• Any untraded quantity is displayed at its limit price, except for the reserve interest of a Day ISO designated as a Reserve Order, which rests non-displayed at the order's limit price.
• That displayed remainder may lock or cross a protected quotation that was displayed at the time of the Day ISO's arrival.
• A Day ISO designated as a Reserve Order may be designated to be cancelled if, upon replenishment, it would be displayed at a price other than its limit price for any reason.

A Day ISO may be designated with an ALO Modifier, making it a Day ISO ALO. An arriving Day ISO ALO to buy (sell) may trade through or lock or cross a protected quotation that was displayed at the time of its arrival. It can be designated to be cancelled on the same terms, and it may not be designated as a Reserve Order.

The Reserve Order paragraph states that bar from the other side. Its closed combination list admits a Day ISO and not a Day ISO ALO.

Its trading and pricing follow the ALO pattern.

• If its limit price crosses the working price of any displayed or non-displayed order on the book, it trades as the liquidity taker with those orders.
• Where it is not designated to cancel, untraded quantity that locks the display price of an order ranked Priority 2 - Display Orders takes a working price and display price one MPV below (above) that displayed order's price.
• Untraded quantity that locks non-displayed contra-side orders takes a working price and display price equal to its limit price.
• Once resting on the book, it is re-priced and re-displayed or trades, or both, based on changes to Priority 2 - Display Orders or the PBO (PBB) of an Away Market, on the same terms as a resting ALO Order.

Exam Tip: Gotchas

• The two versions differ on the remainder, not on the sweep. Both trade up to full size and limit price on arrival, the day version where it is marketable on arrival; only the day version displays what is left, and only that version can sit locking or crossing a protected quotation.
• A Day ISO can be a Reserve Order and a Day ISO ALO cannot. The reserve interest of the first rests non-displayed at the limit price, which is the one exception to displaying the remainder.

Which Orders Carry Specific Routing Instructions?

A Primary Only Order is a Market or Limit Order that on arrival is routed directly to the primary listing market without being assigned a working time or interacting with interest on the book.

Four terms govern it.

• It must be designated for the Core Trading Session.
• The primary listing market validates whether the order is eligible to be accepted by that market.
• If that market rejects the order, the order is cancelled.
• A Primary Only Order instruction on a security listed on the Exchange will be ignored.

The rule then names three versions.

The Day and immediate-or-cancel version carries three more rules. A Primary Only Day Order may be designated as a Reserve Order. The order is routed to an Away Market as a nonroutable order and remains at the Away Market until executed or cancelled.

One exception applies by listing venue. A Primary Only Day/IOC Order in NYSE- and NYSE American-listed securities may include an instruction to be routed to NYSE or NYSE American as a routable order, in which case it remains at that market until executed, routed away, or cancelled.

Two time-based routing orders sit alongside them, and both must be designated Day.

• A Primary Until 9:45 Order is a Limit or Inside Limit Order that, on arrival and until 9:45 a.m. Eastern Time, routes to the primary listing market. After that time it is cancelled on the primary listing market and entered on the book.
• A Primary After 3:55 Order is a Limit or Inside Limit Order entered on the Exchange until 3:55 p.m. Eastern Time, after which it is cancelled on the Exchange and routed to the primary listing market.

An Inside Limit Order designated as either one follows Inside Limit Order processing only when the order is on the book.

Orders returning to the book after routing retain their original order attributes and are assigned a working time based on when the order is returned. Orders that route out at the later time retain their original order attributes too. The two can be combined.

Exam Tip: Gotchas

• The two timed orders run in opposite directions. The morning order starts away and comes back; the afternoon order starts on the Exchange and leaves. Combining them produces an order that does both in one day.
• A returning order keeps its attributes and loses its clock. It retains its original order attributes but takes a working time based on when it is returned, so it does not recover its original queue position.
• A Primary Only instruction is ignored on the Exchange's own listings. The order is not rejected; the instruction simply has no effect.

What Is a Directed Order?

The equities rule defines a Directed Order as a Limit Order with instructions to route on arrival at its limit price to a specified alternative trading system (ATS) with which the Exchange maintains an electronic linkage. Directed Orders are available for all securities eligible to trade on the Exchange.

Like a Primary Only Order, it is not assigned a working time and does not interact with interest on the book, and the receiving system validates whether the order is eligible, cancelling it if that system rejects it.

Its designations are tightly drawn.

• It must be designated for the Core Trading Session.
• It must be designated IOC or Day, and is routed as such.
• It may not be combined with any other modifiers set forth in the Rule.

That bar is an exception. The equities rule's commentary permits users to combine order types and modifiers unless the terms of the proposed combination are inconsistent, and the lesson on the three order-type rules and their vocabulary covers it.

Three timing rules close the definition. A Directed Order in a security having its initial listing on the Exchange will be rejected if received before the IPO Auction concludes. During a trading halt or pause, an incoming Directed Order will be rejected. And a request to cancel a Directed Order designated Day is routed to the alternative trading system to which the order was routed.

Both options rules use the same name for something else entirely: any marketable order to buy or sell which has been directed to a particular Market Maker by an Order Flow Provider. To qualify as a Directed Order there, the order must be delivered electronically to the System.

Exam Tip: Gotchas

• The name means two different things in two rulebooks. In equities a Directed Order goes to a named alternative trading system; in options it goes to a named Market Maker from an Order Flow Provider.
• A cancel request follows the order out. Because a Day Directed Order is resting away from the Exchange, the cancel is routed to the alternative trading system holding it.

What Do the Proactive and Minimum Trade Size Modifiers Do?

The Proactive if Locked/Crossed Modifier applies to a Limit Order or Inside Limit Order that is displayed and eligible to route. An order carrying it will route to an Away Market if that Away Market locks or crosses the display price of the order. If any quantity of the routed order is returned unexecuted, the order will be displayed in the book.

The Minimum Trade Size (MTS) Modifier is available to six order types: a Limit IOC Order, a Non-Displayed Limit Order, an MPL Order, a Tracking Order, a Discretionary Pegged Order, or a non-displayed ALO Order.

An order with the modifier is rejected if the MTS is larger than the size of the order. The entering firm must specify one of two instructions at the time of entry.

• The order will trade with contra-side orders in the book that in the aggregate meet its MTS; or
• The order will trade with individual contra-side orders that each meets its MTS.

What happens when the size cannot be met depends on the time in force.

• Designated Day and not satisfied on arrival: the order will not trade and will be ranked in the book. It is then not eligible to trade at a price equal to or above (below) displayed contra-side orders whose working price is equal to or below (above) its own, nor at a price above (below) non-displayed contra-side orders whose working price is below (above) its own.
• Designated IOC and not immediately satisfied: the order is cancelled in its entirety.

Four rules then govern a resting order carrying the modifier.

• It will trade with individual contra-side orders that each meets the MTS.
• An Aggressing Order that does not meet that MTS will not trade with, and may trade through, the order carrying the modifier.
• Where a resting non-displayed contra-side order did not meet the MTS of a same-priced resting order with the modifier, a subsequently arriving order that meets the MTS trades ahead of that resting non-displayed order at that price.
• It is cancelled if it is traded in part or reduced in size and the remaining quantity is less than its own MTS.

Exam Tip: Gotchas

• An order carrying a minimum trade size can be traded through. An aggressing order that cannot meet the size does not trade with it and may print through it, which is the price of the condition.
• The aggregate and individual instructions are a choice made at entry. The firm must specify one of the two, and a resting order with the modifier trades with individual orders that each meets the size.

What Qualifies an Order for the Retail Modifier?

An order designated with a "retail" modifier is an agency order or a riskless principal order that meets the criteria of the riskless principal exception in the trading ahead of customer orders rule, that originates from a natural person and is submitted to the Exchange by the entering firm. That rule is covered in the unit on identifying and avoiding prohibited practices with customer orders.

Two provisos sit inside the definition.

• No change is made to the terms of the order with respect to price or side of market; and
• The order does not originate from a trading algorithm or any other computerized methodology.

A firm that wants to use the modifier owes the Exchange an attestation and a set of written procedures.

• An attestation, in a form prescribed by the Exchange, that substantially all orders designated as "retail" will qualify under the definition.
• Written policies and procedures reasonably designed to assure that it will only designate orders as retail where all of those requirements are met.
• Those procedures must require the firm to exercise due diligence before entering a retail order, and to monitor whether orders entered as retail orders meet the applicable requirements.

A firm that passes on another broker-dealer's flow carries more. Its supervisory procedures must be reasonably designed to assure that the orders it receives from that customer and designates retail meet the definition, and it must:

• Obtain an annual written representation, in a form acceptable to the Exchange, from each broker-dealer customer that sends it such orders, that entry of those orders as retail will comply; and
• Monitor whether that broker-dealer customer's retail order flow meets the applicable requirements.

The consequence of failing any of it is stated in one sentence: the firm will not be eligible for the "retail" order rates for the orders it designates as retail.

Exam Tip: Gotchas

• The consequence of a failed attestation is a rate, not a ban. The rule says the firm is not eligible for the retail order rates for those orders, rather than prohibiting the designation outright.
• A natural person's order can still fail the test. Any change to price or side of market, or an origin in a trading algorithm or other computerized methodology, takes the order outside the definition.

What Is a Q Order?

A Q Order is a Limit Order submitted by a Market Maker and designated as a Q Order through the means the Exchange specifies. Q Orders entered by firms that are not registered in that security as a market maker will be rejected.

Three terms are built into the order, and three tests reject it.

The obligation attached to it splits by session. Market Makers must enter Q Orders in securities in which they are registered, beginning at the start of the Core Trading Session and continuing until the end of the Core Trading Session. They are not obligated to, but may, enter them during the Overnight, Early, and Late Trading Sessions.

Exam Tip: Gotchas

• A Q Order priced at the protected quote is rejected. The limit price of a buy order must be below the protected offer, so an order priced at that quote does not rest, it fails.
• The obligation is a Core Trading Session obligation. Entry in the other three sessions is permitted and never required.

How Does Self Trade Prevention Work?

An incoming order to buy (sell) designated with a Self Trade Prevention (STP) modifier is prevented from trading with a resting order to sell (buy) that is also designated with an STP modifier and comes from the same Unique Identifier.

The rule defines that identifier three ways: the same Client ID; the same market participant identifier (MPID) and, if specified, any subidentifier; or an Affiliate identifier. For this rule, an Affiliate means any ETP Holder under 75% common ownership or control of that ETP Holder.

Two qualifiers decide the close questions.

• The STP modifier on the incoming order controls the interaction between two orders marked with STP modifiers.
• Orders marked with an STP modifier will not be prevented from interacting during any auction.

The rule names four modifiers, and they differ only in which side of the meeting is cancelled. In each one the resting order may carry any of the four, not the same modifier as the incoming order.

Exam Tip: Gotchas

• The incoming order's modifier governs. The same resting order survives under cancel newest and is cancelled under cancel oldest, so read the label on the arriving order first.
• Self trade prevention stops nothing in an auction. Orders marked with the modifier are not prevented from interacting during any auction, whatever identifier they share.

What Should You Check on Exam Day?

• On any re-pricing question, track both prices. The working price and the display price move separately, and the gap between them sets the priority label.
• On a sweep order, confirm the marking and the simultaneous additional routed orders, and confirm those extra orders are marked as sweep orders too.
• Check the time in force before answering what happens to a remainder. Immediate-or-cancel cancels it; Day displays it, subject to the reserve exception.
• On a Directed Order, confirm the market. Equities means a named alternative trading system; options means a named Market Maker.
• On a self trade prevention question, read the incoming order's modifier, and check whether the interaction is happening inside an auction.