Quick Answer
Three exchange rules supply this unit's vocabulary. Two of them define orders in option contracts, and neither applies to trading on Pillar. The third defines orders and modifiers in equities. The options rules price orders against the best options quotes; the equities rule prices against both national and protected quotations.
Every order type in this unit comes from one of three exchange rules. Before you can answer a question about a Reserve Order or a Pegged Order, you have to know which rule defines it, which market that rule covers, and which quotation the definition is measured against.
Which Market Does Each Rule Govern?
The NYSE American options order types rule and the NYSE Arca options order types rule state their primary order types, the Market Order and the Limit Order, in option contracts. Each one opens with the same sentence: "This Rule is not applicable to trading on Pillar."
The NYSE Arca equities order types rule defines orders and modifiers for equities. Its order types are stated in an amount of a security rather than a number of contracts.
The three are not parallel catalogues, and that is the first thing to check on any question naming an order type and an exchange.
- A type defined in one rule can be absent from another. The Arca options rule defines a Reserve Order and a Stock Contingency Order; the NYSE American rule defines neither.
- A shared name can carry different terms. The Facilitation Order is written "only to be executed" in the Arca options rule and "may be executed" in the NYSE American rule, and the cross is with an order for a public customer of an OTP Holder or OTP Firm on Arca against an order for a Customer of an ATP Holder on NYSE American.
- A name can mean two different things. The equities rule's Directed Order is a Limit Order that routes on arrival at its limit price to a specified alternative trading system with which the Exchange maintains an electronic linkage; in both options rules a Directed Order is a marketable order directed to a particular Market Maker by an Order Flow Provider and delivered electronically to the system.
Cboe's own order types are covered in the unit on options trading.
Exam Tip: Gotchas
- Both options rules disclaim Pillar in their first line. A question that places an options order type on the Pillar platform is testing that opening sentence, not the order type below it.
- The equities rule and the options rules are separate catalogues, not one list. An order type is only defined where its own rule defines it, so check the market before you apply a definition.
What Prices Do the Definitions Turn On?
The two options rules price and reject orders against the national best bid (NBB), the national best offer (NBO) and, collectively, the national best bid and offer (NBBO), "as disseminated by OPRA", the Options Price Reporting Authority.
Regulation NMS supplies the underlying federal term. The national market system (NMS) definitions rule defines the national best bid and national best offer as the best bid and best offer for an NMS stock calculated and disseminated on a current and continuing basis by a competing consolidator or calculated by a self-aggregator.
For NMS securities other than NMS stocks, that definition uses the best bid and offer calculated and disseminated on a current and continuing basis by a plan processor under an effective national market system plan.
Where two or more market centers transmit identical bids or offers to a plan processor, a competing consolidator or a self-aggregator, the rule ranks them first by size, giving the highest ranking to the largest size, and then by time, giving the highest ranking to the bid or offer received first in time.
The equities rule prices orders against the NBBO and also against the protected bid, the PBB, the protected offer, the PBO, and the two together, the PBBO. It uses all three abbreviations and defines none of them.
The federal term underneath them is a protected bid or protected offer, which Regulation NMS defines with a three-part test. A protected quotation is a quotation in an NMS stock that:
- Is displayed by an automated trading center;
- Is disseminated pursuant to an effective national market system plan; and
- Is an automated quotation that is the best bid or best offer of a national securities exchange, or the best bid or best offer of a national securities association.
Regulation NMS itself is covered in the unit on Regulation NMS. Here it matters only because the exchange definitions borrow its terms.
Exam Tip: Gotchas
- The options rules and the equities rule use different reference quotations. Options order types turn on the NBBO as disseminated by the Options Price Reporting Authority. Many equity order types turn on the protected quotations instead, the quotations that pass the three-part protected-quotation test.
- A protected quotation must satisfy all three parts of the federal test. A quotation that is displayed and disseminated but is not an automated quotation, or is not an exchange's or association's best, is not protected.
What Do Limit Price, Working Price and Display Price Mean?
The equities rule separates three prices, and most of its mechanics are written as a change to one of them.
| Price | What it is |
|---|---|
| Limit price | The price the entering firm specified on the order |
| Working price | The price at which the order may trade |
| Display price | The price at which the order is displayed |
The rule prices these in the security's minimum price variation (MPV). Several order types are re-priced "one MPV below (above)" a reference price, so the MPV is the unit those adjustments are measured in.
Exam Tip: Gotchas
- A working price and a display price can differ on the same order. That gap is not an error; on a Non-Routable Limit Order it is what moves the order's priority label from a display rank to a non-display rank.
How Do Order Types and Modifiers Combine?
The equities rule answers this in its commentary. Users may combine order types and modifiers, unless the terms of the proposed combination are inconsistent.
When two combined order types include instructions both for operation on arrival and for how the order operates while resting on the book, the commentary sets an order of operations.
- The instructions governing functionality while incoming are operative upon arrival.
- The functionality governing how the order operates while resting on the book governs any remaining balance of the order that is not executed upon arrival.
The Arca options rule carries a different commentary, and it is a hard limit rather than a permission: "All orders must be either 'day,' 'immediate or cancel' or 'good 'til cancelled.'" The NYSE American rule prints no equivalent sentence.
Exam Tip: Gotchas
- The three time-in-force choices come from the Arca options rule's commentary alone. Do not carry that closed list of three onto the equities rule, which offers only two time-in-force modifiers, or onto the NYSE American rule, which prints no such commentary.
- Combination is permitted by default and blocked only by inconsistency. The commentary does not publish a list of allowed pairs; it bars the combinations whose own terms conflict.
What Are the Four Priority Labels?
The equities rule tags order types with one of four named priority categories. The rule states which label a type takes; it does not set out how the four ranks are allocated against one another, though it does rank orders inside a label, prioritizing a Discretionary Pegged Order exercising discretion behind non-display orders whose working price equals its discretionary price at the time of execution.
| Priority label | Order types the rule assigns to it |
|---|---|
| Priority 1 - Market Orders | Unexecuted Market Orders |
| Priority 2 - Display Orders | Limit Orders, unless otherwise specified; the display quantity of a Reserve Order; a Non-Routable Limit Order whose working price equals its display price; the display quantity of a Primary Pegged Order |
| Priority 3 - Non-Display Orders | Reserve interest; Non-Displayed Limit Orders; Mid-Point Liquidity Orders; a Non-Routable Limit Order whose working price differs from its display price; Market Pegged Orders; Discretionary Pegged Orders exercising discretion |
| Priority 4 - Tracking Orders | Tracking Orders |
Exam Tip: Gotchas
- One order can carry two labels at once. A Reserve Order's displayed quantity is ranked as a display order while its reserve interest is ranked as a non-display order, and a Primary Pegged Order splits the same way.
What Should You Check on Exam Day?
- Identify the market first. An options order type comes from one of the two options rules; an equity order type comes from the equities rule.
- On any options order-type question, check whether the scenario puts the order on Pillar, because both options rules exclude it in their first line.
- Ask which quotation the definition names. Options types run off the national best bid and offer; most equity types run off the protected quotations.
- Do not assume two rules define a type the same way, or define it at all. Confirm the name appears in the rule the question is testing.
- Where two combined order types carry both arrival and resting instructions, the incoming instructions operate on arrival and the resting instructions govern any balance not executed on arrival.