Options Order Types and Their Routing Rules

This is the long tail of the two options rulebooks. Read it as a set of contrasts, because most of the tested detail is a difference between the two rules rather than a fact about one.

One background limit runs under the Arca options rule's specific types: its commentary says all orders must be day, immediate-or-cancel or good-til-cancelled. The lesson on the three order-type rules and their vocabulary covers it, and the NYSE American rule prints no equivalent.

What Is a Complex Order?

Both options rules define a Complex Order as any order involving the simultaneous purchase and/or sale of two or more different option series in the same underlying security, for the same account, in a ratio equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00), and for the purpose of executing a particular investment strategy.

Two sentences then handle mini-options.

• For the purpose of applying that ratio to Complex Orders comprised of both mini-options contracts and standard contracts, ten mini-options will represent one standard contract.
• Orders comprised of both mini-options contracts and standard contracts are not available for Electronic Complex Order trading.

Exam Tip: Gotchas

• The ratio is bounded on both sides. A Complex Order must sit between one-to-three and three-to-one inclusive, so a lopsided pair outside that band is not a Complex Order under either rule.
• A mixed mini and standard order is defined but not electronically tradable. It still counts as a Complex Order for the ratio, using ten minis to one standard, and it is excluded from Electronic Complex Order trading.

How Do the Stock-Linked Orders Set Their Ratios?

Three types couple options with something else. Two of them cap the relationship, the stock and option pairing at 8 option contracts per unit of trading and the Complex pairing at eight-to-one, while the single stock future pairing sets no ratio cap and is limited to open outcry trading.

A Stock/Option Order is an order to buy or sell a stated number of units of an underlying stock or a security convertible into it, coupled with the purchase or sale of option contracts on the opposite side of the market, representing either:

• The same number of units of the underlying stock or convertible security; or
• The number of units of the underlying stock necessary to create a delta neutral position.

That second branch carries the cap, printed immediately after it: in no case in a ratio greater than 8 option contracts per unit of trading of the underlying stock or convertible security established for that series by the Clearing Corporation.

A Stock/Complex Order is a Complex Order coupled with a stock or convertible security order representing either:

• The same number of units as are represented by the options leg of the Complex Order with the least number of option contracts; or
• The number of units necessary to create a delta neutral position, and that branch is capped in no case in a ratio greater than eight-to-one (8.00).

The rule defines that ratio in its own terms: the total number of units of the underlying stock or convertible security in the option leg to the total number of units of the underlying stock or convertible security in the stock leg.

A Single Stock Future (SSF)/Option Order couples SSF units, or a security convertible into a single stock future, with either:

• Option contracts on the opposite side of the market, representing the same number of underlying units or the number needed for a delta neutral position; or
• An equal number of put and call option contracts, each having the same exercise price and expiration date and each representing the same number of units of underlying stock, on the opposite side of the market from the stock underlying the future or convertible portion of the order.

Single Stock Future/Option Orders are only eligible for open outcry trading, the same restriction both rules place on a One-cancels-the-other Order and the Arca rule places on a Stock Contingency Order.

Exam Tip: Gotchas

• The two caps are written in different units. The stock and option pairing is capped at 8 option contracts per unit of trading; the Complex pairing is capped at a ratio of eight-to-one between the option leg and the stock leg.
• The delta neutral branch is the one the cap governs. Where the order is built on matching unit counts instead, the ratio question does not arise.

What Is a Facilitation Order, and Why Do the Two Rules Differ?

A Facilitation Order is an order clearly designated as a Facilitation Order that trades in a cross transaction. The designation both rules share. The NYSE Arca rule says the order is only to be executed in a cross transaction, while the NYSE American rule says it may be, and the rest does not match either.

The rulebooks print both, and the difference is real: one paragraph reads as a restriction on how the order may be executed, and the other reads as a permission.

Exam Tip: Gotchas

• The two rulebooks state the Facilitation Order in different moods. Read the exchange named in the question before deciding whether the cross is the only permitted execution or one available execution.

Where Does a NOW Order Route?

A NOW Order is a Limit Order to be executed in whole or in part on the Exchange, with the portion not so executed routed only to one or more NOW Recipients for immediate execution as soon as the order is received by the NOW Recipient.

Two disposal rules follow.

• Any portion not immediately executed by the NOW Recipient shall be cancelled.
• If a NOW Order is not marketable against the NBBO, the national best bid and offer, when it is submitted, it shall be cancelled.

Exam Tip: Gotchas

• A NOW Order that is not marketable on submission never rests. It is cancelled at the door, so the routing instruction only ever applies to an order that was marketable when it arrived.

What Must an Options Sweep Order Do?

Both options rules define an Intermarket Sweep Order (ISO) as a Limit Order for an options series that instructs the Exchange to execute the order up to the price of its limit, regardless of the NBBO. The conditions attached to it are not the same.

The NYSE American rule prints its condition in the paragraph itself. A firm may submit an ISO only if it has simultaneously routed one or more additional ISOs, as necessary, to execute against the full displayed size of:

• Any Protected Bid, in the case of a limit order to sell; or
• Any Protected Offer, in the case of a limit order to buy,

for the options series with a price that is superior to the limit price of the ISO.

The NYSE Arca rule attaches two conditions instead, and the second is a cross-reference rather than a test printed in the paragraph.

• ISOs may only be entered with a time-in-force of immediate-or-cancel (IOC); and
• The entering firm must comply with the provisions of a separate Exchange rule that the paragraph names.

Exam Tip: Gotchas

• Only one of the two options rules prints the simultaneous-routing test. The NYSE American paragraph states it in full; the Arca paragraph adds a time-in-force limit and sends the reader to another rule.
• The options sweep order has a stated time-in-force limit in one rulebook. Under the Arca rule it can only be entered immediate-or-cancel, which the NYSE American paragraph does not say.

What Is a Liquidity Adding Order in Options?

The Arca options rule defines a Liquidity Adding Order (ALO) as a Limit Order which is to be accepted only if it is not executable at the time of receipt. The NYSE American rule defines none.

Three conditions come with it.

• Orders with the liquidity adding instruction that are marketable against the NBBO will not be routed, but will be rejected.
• An ALO may only be entered as a Day Order.
• An ALO or a Repricing ALO will be rejected if entered outside of Core Trading Hours or during a trading halt or, if resting, will be cancelled in the event of a trading halt.

A Repricing ALO (RALO) is an ALO that will be repriced instead of rejected where it would trade as the liquidity taker, or display at a price that locks or crosses any interest on the Exchange or the NBBO. A RALO designated as a Reserve Order will be rejected.

The repricing itself works from two different reference points, and each adjustment is one minimum price variation (MPV) for the series.

• An incoming RALO to buy (sell) that would trade with any displayed or undisplayed contra-side interest on the Consolidated Book is displayed one MPV below (above) that interest.
• An incoming RALO to buy (sell) that is not marketable against Consolidated Book interest but would lock or cross the NBO (NBB) is displayed one MPV below (above) the NBO (NBB).
• If that Book interest or the NBO (NBB) moves up (down), the display price and the undisplayed price at which the order is eligible to trade are continuously adjusted, up (down) to the RALO's limit price.

Where a resting RALO trades depends on which reference it was priced against.

• One displayed one MPV inside interest on the Consolidated Book trades at its display price.
• One displayed one MPV inside the NBO (NBB) trades at the NBO (NBB); provided, however, that if the NBO (NBB) updates to lock or cross its display price, it trades at its display price in time priority behind other eligible interest already displayed at that price.

Two priority sentences and one cancellation sentence close the type. Each time there is an update to the price of the RALO, the Exchange ranks it by time priority behind other eligible interest already at that price. Where multiple RALOs simultaneously reprice to the same price at which they are eligible to trade, they are prioritized based on the time of original order entry.

An incoming RALO is cancelled if it has a limit price to buy (sell) more than a configurable number of MPVs above (below) the initial display price on arrival, and the Exchange determines that configurable number, announcing it by Trader Update.

Exam Tip: Gotchas

• Repricing costs the order its queue position every time. Each price update ranks the order behind interest already at the new price, so an order that reprices repeatedly keeps going to the back.
• A resting repriced order does not always trade at its display price. Priced inside the national quote, it trades at that quote; priced inside book interest, it trades at its own display price.

What Do the Mid-Point Crossing and Attributable Orders Do?

The Arca options rule defines a Mid-Point Crossing Order as an order to be crossed at the mid-point price or better of the electronically disseminated best bid and offer in the relevant option series; provided, however, that the mid-point must fall on an MPV. If the mid-point does not fall on an MPV, the order is cancelled. The NYSE American rule defines none.

Both rules define an Attributable Order as a market or limit order which displays the user firm ID for purposes of electronic trading on the Exchange. Three sentences qualify it.

• Use of attributable orders is voluntary.
• Attributable orders may not be available for all Exchange processes.
• The Exchange will issue a Regulatory Bulletin specifying the processes for which the order type is available.

Cboe's own option order types sit in a different rulebook and are covered in the unit on options trading.

Exam Tip: Gotchas

• A mid-point that is not on a valid increment kills the cross. The order is cancelled rather than rounded to the nearest minimum price variation.
• Attribution is a display choice, not a routing or pricing term. It shows the user firm ID and changes nothing about how the order trades.

What Is a Qualified Contingent Cross Order?

Both options rules define a Qualified Contingent Cross (QCC) Order as an originating order to buy or sell at least 1,000 contracts, or 10,000 mini-options contracts, that is identified as being part of a qualified contingent trade, coupled with a contra-side order or orders totaling an equal number of contracts.

Each rule then defines a qualified contingent trade in its commentary, in the same terms: a transaction consisting of two or more component orders, executed as agent or principal, where all six of these conditions hold.

1. At least one component is an NMS Stock, a term the national market system (NMS) definitions in Regulation NMS supply.
2. All components are effected with a product or price contingency that either has been agreed to by all the respective counterparties or is arranged for by a broker-dealer as principal or agent.
3. The execution of one component is contingent upon the execution of all other components at or near the same time.
4. The specific relationship between the component orders, such as the spread between their prices, is determined by the time the contingent order is placed.
5. The component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or cancelled.
6. The transaction is fully hedged, without regard to any prior existing position, as a result of other components of the contingent trade.

Regulation NMS defines an NMS security as one for which transaction reports are collected, processed and made available under an effective transaction reporting plan, or under an effective national market system plan for reporting transactions in listed options. An NMS stock is any NMS security other than an option, so the first condition puts an equity leg in the trade.

Cboe states the same six-condition test in its own rulebook, and that statement is covered in the unit on options trading.

Exam Tip: Gotchas

• The size threshold has two forms. At least 1,000 contracts, or at least 10,000 mini-options contracts, and the contra side must total an equal number of contracts.
• All six conditions must hold together. A hedged two-leg trade with no equity component fails the first condition however well it satisfies the other five.

How Does the PNP Family Handle a Locked or Crossed Market?

The plain, light, blind and repricing members share one instruction: execute what you can on the Exchange, then rank the remainder in the Consolidated Book without routing any portion of the order to another Market Center. They part company on what happens when the remainder would lock or cross the NBBO.

The NYSE American rule adds one sentence the Arca rule does not print: a PNP Order designated as an IOC Order will be treated as an immediate-or-cancel order, so any unexecuted portion cancels.

The Repricing PNP Order has its own mechanics, and both rules agree on most of them.

• It may only be entered as a Day Order. Under the Arca rule, one designated as a Reserve Order will be rejected.
• One received during pre-open or during a trading halt is treated as a PNP Order and will not reprice, for the purpose of participating in opening or re-opening auctions.
• One to buy (sell) that would lock or cross the NBO (NBB) is displayed one MPV below (above) it, and if the NBO (NBB) moves up (down) the display price and the undisplayed price at which it is eligible to trade are continuously adjusted, up (down) to its limit price.
• It trades at the NBO (NBB); provided, however, that if the NBO (NBB) updates to lock or cross its display price, it trades at its display price. The Arca rule adds that it does so in time priority behind other eligible interest already displayed at that price.
• An incoming RPNP is cancelled if its limit price to buy (sell) is more than a configurable number of MPVs above (below) the initial display price on arrival, after first trading with eligible interest, if any. The Exchange determines that configurable number and announces it by Trader Update.

The priority sentence is where the two rules genuinely disagree, and each rulebook prints its own.

• The NYSE American rule: each time the price updates, the Exchange ranks the RPNP with other eligible interest at that price, and the order trades at each price point, to the extent possible.
• The Arca rule: each time the price updates, the Exchange ranks the RPNP by time priority behind other eligible interest already at that price. Where multiple RPNPs simultaneously reprice to the same price, they are prioritized based on the time of original order entry.

One further member exists in the Arca rule alone. PNP Plus is an Electronic Complex Order automatically re-priced by the Exchange to an MPV greater than the Complex BBO bid for sell orders, or an MPV lower than the Complex BBO offer for buy orders, for any or all of the order that remains unexecuted and would otherwise lock or cross the Complex BBO if displayed.

The re-priced order is then posted in the Consolidated Book. It continues to be repriced with each change in the Complex BBO until the Complex BBO moves to a price where the order's original limit price no longer locks or crosses it, at which point the order reverts to that original limit price. Each reposting assigns a new price time priority. Its paragraph prints no routing instruction.

Exam Tip: Gotchas

• Four members are measured against the national quote and a fifth against the Complex BBO. On a lock or cross of the national quote, the plain post-no-preference order and the light version are cancelled, the blind version rests undisseminated, and the repricing version is displayed one increment inside. PNP Plus is repriced one increment inside the Complex BBO instead.
• The light version has a second cancellation trigger. It is also cancelled where it would be marketable against undisplayed interest in the Consolidated Book, which no other member of the family carries.
• The two rulebooks rank a repriced order differently. One ranks it with other interest at the price and trades it at each price point; the other ranks it behind interest already there. Read the exchange in the question.

What Should You Check on Exam Day?

• Check which rulebook the question names. Several of these types exist in the NYSE Arca options rule alone, including the repricing liquidity adding order and the light and plus versions of the post-no-preference order.
• On a multi-leg order, identify the branch first. The ratio cap attaches to the delta neutral branch, not to the matching-units branch.
• On a post-no-preference question, ask what the remainder would do to the national quote, or to the Complex BBO for PNP Plus, then read off whether the rule cancels, hides or reprices it.
• On a qualified contingent cross, test the size on both sides and confirm every one of the six conditions of the contingent trade.
• Where two rulebooks state a shared type differently, answer from the exchange in the fact pattern rather than from the version you learned first.