Pegged Orders

A pegged order follows the market instead of naming a price. The three types differ in which quotation they follow, whether an offset is allowed, and what they do when the protected quote breaks.

What Is a Pegged Order?

The NYSE Arca equities order types rule defines a Pegged Order as a Limit Order that does not route, with a working price that is pegged to a dynamic reference price.

The limit price caps the peg in both directions. If the designated reference price is higher (lower) than the limit price of a Pegged Order to buy (sell), the working price will be the limit price of the order.

The rule then defines three types, and the first distinction is the side of the market each one follows.

Exam Tip: Gotchas

• A pegged order never routes. The definition builds that into the parent type, so no pegged order reaches an Away Market however aggressive its reference price becomes.
• The limit price wins whenever the peg would cross it. The working price falls back to the limit price rather than following the reference price past it.

How Does a Market Pegged Order Work?

A Market Pegged Order to buy (sell) has a working price pegged to the PBO (PBB), the protected offer for a buy order and the protected bid for a sell order. That is the contra side of the market, so the order sits where it can trade.

Four standing terms attach to it.

• It is rejected on arrival, or cancelled when resting, if there is no PBO (PBB) against which to peg.
• It will not participate in any auctions.
• Market Pegged Orders are not displayed and are ranked Priority 3 - Non-Display Orders.
• It may include an offset value that sets the working price below (above) the PBO (PBB) by the specified offset, which may be specified up to two decimals.

Where the PBBO is locked or crossed, both an arriving and a resting Market Pegged Order wait for a PBBO that is not locked or crossed before the working price is adjusted and the order becomes eligible to trade.

Exam Tip: Gotchas

• The market peg follows the far side of the market. A Market Pegged Order to buy tracks the protected offer, and an offset moves its working price back below that offer rather than above it.

How Does a Primary Pegged Order Differ?

A Primary Pegged Order to buy (sell) is pegged to the PBB (PBO), its own side of the market, with no offset allowed.

It is rejected on arrival, or cancelled when resting, if there is no PBB (PBO) against which to peg.

Unlike the market peg, it can trade in auctions, with one carve-out. It is eligible to participate in auctions at the limit price of the order, provided that it is not eligible to participate in the Closing Auction.

Its price and priority are written together: the working price equals the display price, the display quantity is ranked Priority 2 - Display Orders, and the reserve interest is ranked Priority 3 - Non-Display Orders.

A Reserve Order may be combined only with a Non-Routable Limit Order, a Primary Pegged Order or a Day intermarket sweep order, which is why a Primary Pegged Reserve Order exists and no market or discretionary pegged Reserve Order does.

A locked or crossed protected quote produces three different results depending on when it happens.

Exam Tip: Gotchas

• The two named pegs face opposite directions. A Market Pegged Order to buy follows the protected offer and may carry an offset; a Primary Pegged Order to buy follows the protected bid and takes no offset at all.
• A locked or crossed market destroys a Primary Pegged Reserve Order rather than pausing it. Where the protected quote is locked or crossed at the moment the display quantity is replenished, the rule cancels the entire order, not merely the replenishment.

What Discretion Does a Discretionary Pegged Order Exercise?

A Discretionary Pegged Order takes two working prices in sequence.

• On entry, it is assigned a working price equal to the lower (higher) of the midpoint of the PBBO, which the rule names the Midpoint Price, or the limit price of the order.
• Any untraded shares are then assigned a working price equal to the lower (higher) of the PBB (PBO) or the order's limit price, and that price is automatically adjusted in response to changes to the PBB (PBO), up (down) to the order's limit price.

To trade with contra-side orders on the book, the order exercises the least amount of price discretion necessary from its working price to its discretionary price. The rule defines that discretionary price as the lower (higher) of the Midpoint Price or the order's limit price.

Session and display terms are strict. Discretionary Pegged Orders are not displayed, must be designated Day, and are eligible to be designated for the Core Trading Session only. One that includes a designation for the Overnight, Early or Late Trading Session will be rejected.

The rule also names this type as one of the six that may carry a Minimum Trade Size Modifier, covered in the lesson on equity order types and modifiers.

Priority while exercising discretion has two parts.

• The order maintains its time priority at its working price as Priority 3 - Non-Display Orders, and is prioritized behind Priority 3 - Non-Display Orders with a working price equal to the discretionary price at the time of execution.
• Where multiple Discretionary Pegged Orders exercise price discretion during the same book processing action, they maintain their relative time priority at the discretionary price.

As with the market peg, a locked or crossed PBBO makes both an arriving and a resting Discretionary Pegged Order wait for a PBBO that is not locked or crossed before the working price is adjusted and the order becomes eligible to trade.

Exam Tip: Gotchas

• Discretion is exercised in the smallest amount that works. The order reaches from its working price toward its discretionary price only as far as it must to trade, so it does not simply execute at the midpoint.
• Using discretion costs the order its place against resting non-display interest. At the discretionary price it ranks behind non-display orders already working there, while keeping its own time priority at its working price.
• The order is a Core Trading Session instrument. A designation naming the Overnight, Early or Late session is rejected outright rather than trimmed back to the core.

What Happens When the Protected Quote Breaks?

The three types answer that question three different ways, and the answer also depends on whether the quote is missing or merely locked or crossed.

Exam Tip: Gotchas

• A missing quote and a crossed quote are different failures. A Market Pegged Order and a Primary Pegged Order are each rejected on arrival, or cancelled when resting, where there is no quote to peg to, and the rule provides no such branch for the Discretionary Pegged Order. Only the Primary Pegged Order is rejected outright for arriving into a locked or crossed market.

What Should You Check on Exam Day?

• Name the reference quote first. Market pegs follow the contra side, primary pegs the same side, and discretionary pegs start at the midpoint.
• Check for an offset. Only a Market Pegged Order may carry one, and it may be specified up to two decimals.
• On an auction question, remember a Primary Pegged Order participates at its limit price but never in the Closing Auction, and a Market Pegged Order participates in none.
• Ask when the market locked or crossed. Arrival, replenishment and resting produce different outcomes, and among those three only replenishment cancels a whole order.
• Treat the limit price as the cap in every case. No peg gives an order a working price beyond its own limit.