Reserve Orders and Other Undisplayed Interest

The equities rule collects four order types under orders with a conditional or undisplayed price and/or size, and they hide size in different ways. A Reserve Order shows a slice and holds the rest back. A Non-Displayed Limit Order and a Mid-Point Liquidity Order show nothing. A Tracking Order shows nothing and waits for one specific kind of contra-side order.

Other types elsewhere in that rule are undisplayed too, including the market and discretionary pegs and a liquidity adding order designated non-displayed. A liquidity adding order so designated may not also be designated as a Reserve Order.

What Is a Reserve Order?

The Arca options rule defines a Reserve Order as a limit order with a portion of the size displayed and with a reserve portion of the size ("reserve size") that is not displayed on NYSE Arca. That is the whole options definition, and the NYSE American rule has no equivalent.

The Arca options rule carries two more Reserve Order rules outside that definition. A repricing post-no-preference order designated as a Reserve Order is rejected, and so is a repricing liquidity adding order designated as a Reserve Order.

The NYSE Arca equities order types rule defines the equity version at length. It is a Limit or Inside Limit Order with a quantity of the size displayed and a reserve quantity of the size, called the reserve interest, that is not displayed.

The order carries two priority labels at once.

• The displayed quantity is ranked Priority 2 - Display Orders.
• The reserve interest is ranked Priority 3 - Non-Display Orders.

Three more standing rules apply on arrival and while resting.

• Both the display quantity and the reserve interest of an arriving marketable Reserve Order are eligible to trade with resting interest in the book or route to Away Markets.
• The working price of the reserve interest of a resting Reserve Order is adjusted in the same manner as a Non-Displayed Limit Order.
• A Reserve Order must be designated Day and may be combined with the following orders only: a Non-Routable Limit Order, a Primary Pegged Order, or a Day intermarket sweep order (Day ISO).

Where a Primary Pegged Reserve Order replenishes its display quantity while the protected best bid and offer is locked or crossed, the entire order is cancelled. The lesson on pegged orders works through that consequence.

Exam Tip: Gotchas

• The reserve interest is priced like a different order type. Its working price moves under the Non-Displayed Limit Order rules, so it can sit at the protected quote rather than at the order's own limit price.
• The combination list is short, and it is not the whole rule. The Reserve Order paragraph names a Non-Routable Limit Order, a Primary Pegged Order or a Day ISO. The routing subsection separately permits a Primary Only Day Order to be designated as a Reserve Order, and the sweep-order paragraph bars a Day ISO carrying the liquidity adding modifier from being one.

How Is the Display Quantity Replenished?

On entry, the display quantity must be entered in a mixed or round lot quantity. The displayed portion is replenished when the display quantity is decremented to below a round lot.

The size of that replenishment is stated as a choice between two amounts: the minimum display size of the order, or the remaining quantity of the reserve interest if that is less than the minimum display quantity.

Working time is where most of the tested detail sits.

• Each time the display quantity is replenished from reserve interest, a new working time is assigned to the replenished quantity. Each display quantity with a different working time is a child order.
• The reserve interest retains the working time of original order entry.
• When a Reserve Order is replenished and already has two child orders that equal less than a round lot, the child order with the later working time rejoins the reserve interest and is assigned the new working time assigned to the next replenished quantity.

Price on replenishment depends on routability. If the Reserve Order is not routable, the replenish quantity takes a display and working price consistent with the instructions for the order. The one exception: the replenish quantity of a Day ISO designated as a Reserve Order is priced in the same manner as a Non-Routable Limit Order.

That order may also be designated to be cancelled if, upon replenishment, it would be displayed at a price other than its limit price for any reason. Its reserve interest rests non-displayed at the order's limit price, an express carve-out from the Day ISO's ordinary display at its limit price.

Exam Tip: Gotchas

• The whole order does not re-queue when the display refreshes. Only the replenished display quantity takes a new working time; the reserve interest keeps the time of original order entry.
• A child order can lose its place by rejoining the reserve. Where two child orders together are under a round lot at replenishment, the later one goes back into reserve interest and takes the next replenishment's new working time.

How Does a Reserve Order Route and Cancel?

A routable Reserve Order is evaluated for routing both on arrival and each time the display quantity is replenished.

Where routing is required, the sequence is fixed. The Exchange routes from reserve interest before publishing the display quantity. If, after routing, there is less than a round lot available to display, the Exchange waits until the routed quantity returns, executed or unexecuted, before publishing the display quantity.

Quantity that comes back unfilled is folded into the resting order.

• Any quantity returned unexecuted joins the working time of the reserve interest.
• Where there is no reserve interest to join, the returned quantity is assigned a new working time as reserve interest.

In either case that reserve interest then replenishes the display quantity under the ordinary replenishment provisions, so returned shares do not sit in reserve permanently.

Cancellation runs from the back of the order forward. A request to reduce the size of a Reserve Order cancels the reserve interest before cancelling the display quantity. Where there is more than one child order, the child order with the later working time is cancelled first.

Exam Tip: Gotchas

• Routing comes out of the hidden side first. The Exchange routes from reserve interest before it publishes the display quantity, so a routable Reserve Order can show nothing until its routed shares come back.
• A size reduction takes the hidden shares first. Reserve interest is cancelled before the display quantity, and the newest child order goes before an older one.

What Happens to a Non-Routable or Day ISO Reserve Order When the Protected Quote Crosses?

One paragraph handles the crossed market, and it applies to a narrow set of Reserve Orders: those that are a Non-Routable Limit Order or a Day ISO. It is written against the protected bid and protected offer, which the rule abbreviates as the PBB and the PBO, and the two together as the PBBO.

If the PBBO is crossed and the display quantity of such a Reserve Order to buy (sell) is decremented to less than a round lot, then:

• The display price and working price of that Reserve Order do not change; and
• The reserve interest that replenishes the display quantity is assigned a display price one minimum price variation (MPV) below (above) the PBO (PBB) and a working price equal to the PBO (PBB).

When the PBBO uncrosses, the display price and working price are adjusted under the Non-Routable Limit Order provisions, except that a Reserve Order that is an ALO Order is adjusted under the ALO Order provisions instead. The Arca options rule writes that short name out in full as a Liquidity Adding Order (ALO).

Exam Tip: Gotchas

• The crossed-market branch prices the replenishment, not the resting order. The order's own display and working prices are held still; it is the reserve interest coming in behind them that takes the new prices.

How Does a Non-Displayed Limit Order Price Itself?

A Non-Displayed Limit Order is a Limit Order that is not displayed and does not route. It is ranked Priority 3 - Non-Display Orders, must be designated Day, is valid for any trading session, and does not participate in any auctions.

Its working price is adjusted both on arrival and when resting, based on the order's own limit price, and the rule states both directions.

• Limit price of an order to buy (sell) at or below (above) the PBO (PBB): working price equals the limit price.
• Limit price of an order to buy (sell) above (below) the PBO (PBB): working price equals the PBO (PBB).

Exam Tip: Gotchas

• An aggressive limit price does not buy a better working price. Priced through the protected quote, the order works at that quote rather than at its own limit, so the extra price buys nothing until the quote moves.

What Is a Mid-Point Liquidity Order?

A Mid-Point Liquidity (MPL) Order is a Limit Order to buy (sell) that is not displayed and does not route, except as its own routing subparagraph provides. Its working price is the lower (higher) of the midpoint of the PBBO or its limit price.

It is ranked Priority 3 - Non-Display Orders, is valid for any session, and does not participate in any auctions. It must be designated with a limit price in the MPV for the security and is eligible to trade at the working price of the order.

The order waits out a broken quote. Where there is no PBB, no PBO, or the PBBO is locked or crossed, both an arriving and a resting MPL Order wait for a PBBO that is not locked or crossed before becoming eligible to trade.

Three trading rules then say who removes liquidity from whom.

• An Aggressing MPL Order to buy (sell) trades at the working price of resting contra-side orders when those resting orders have a working price at or below (above) its own working price.
• Resting MPL Orders to buy (sell) trade against all Aggressing Orders to sell (buy) priced at or below (above) the MPL Order's working price.
• Where resting MPL Orders trade with contra-side MPL Orders after there is an unlocked or uncrossed PBBO, the MPL Order with the later working time is the liquidity-removing order.

Exam Tip: Gotchas

• The midpoint is a ceiling for a buyer, not a target. The working price is the lower of the midpoint and the limit price for a buy order, so a limit price inside the midpoint keeps the order below it.
• Two resting midpoint orders can meet, and the later one pays. After the protected quote unlocks, the MPL Order with the later working time is treated as the liquidity remover.

What Do the Mid-Point Liquidity Modifiers Change?

An MPL Order may be designated immediate-or-cancel, an MPL-IOC Order. It follows the same trading and priority rules as an MPL Order, with one change and two limits.

• It is rejected where there is no PBBO or the PBBO is locked or crossed, rather than waiting.
• It cannot be designated ALO or with a Non-Display Remove Modifier.
• It may be designated with a Midpoint Ping routing strategy. An order so designated will be accepted and routed pursuant to such strategy even if there is no PBBO or the PBBO is locked or crossed.

An MPL Order may also be designated with an ALO Modifier, making it an MPL-ALO Order. An Aggressing MPL-ALO Order to buy (sell) trades at the working price of resting contra-side orders when it would receive price improvement over its working price of at least one MPV.

An MPL-ALO Order that is not eligible to trade that way is ranked in the book at its working price, and is then not eligible to trade:

• At a price equal to or above (below) any contra-side orders that are displayed and have a working price equal to or below (above) its own working price; or
• At a price above (below) any contra-side orders that are not displayed and have a working price below (above) its own working price.

One queue-jumping rule follows. If an MPL-ALO Order cannot trade with a same-priced resting contra-side order that is not displayed, a subsequently arriving order eligible to trade at the MPL-ALO Order's working price trades ahead of that resting order.

An MPL-ALO Order cannot be designated with a Non-Display Remove Modifier. An MPL Order designated Day may be.

Exam Tip: Gotchas

• The immediate-or-cancel version is rejected where the plain version waits. The one exception is the Midpoint Ping routing strategy, which is accepted and routed even with no protected quote at all.
• An aggressing liquidity-adding midpoint order needs a full increment of price improvement. Anything less than one minimum price variation over its working price leaves it ranked instead of traded.

How Does a Tracking Order Trade?

A Tracking Order is an order to buy (sell) with a limit price that is not displayed, does not route, must be entered in round lots and designated Day, and will trade only with an order to sell (buy) that is eligible to route.

Its working price is the PBB (PBO), provided that price is at or below (above) its own limit price. It is ranked Priority 4 - Tracking Orders, may trade in odd lot or mixed lot quantities, and is not eligible to trade if the PBBO is locked or crossed.

A Tracking Order does not trade on arrival. It is triggered by a contra-side order that meets all three of the rule's conditions.

1. It has exhausted all other interest eligible to trade at the Exchange;
2. It has a remaining quantity equal to or less than the size of a resting Tracking Order; and
3. It would otherwise route to an Away Market.

When it does trade, the Tracking Order trades with the entire unexecuted quantity of the contra-side order, not just the quantity being routed.

Two working-time rules close the definition. Each time a Tracking Order is traded in part, the remaining quantity is assigned a new working time. And a Tracking Order with a later working time trades ahead of one with an earlier working time that does not meet the size requirement of an incoming order.

Exam Tip: Gotchas

• A Tracking Order works at its own side of the market. Its working price is the protected bid for a buy order, and only where that price is at or below its limit price, so the order does not price through the protected quote.
• The trigger requires all three conditions together. A contra-side order that would route but has not exhausted other eligible interest, or that is larger than the Tracking Order, does not trigger it.
• The fill is bigger than the routed slice. Once triggered, the Tracking Order takes the contra-side order's entire unexecuted quantity.

What Does the Non-Display Remove Modifier Do?

Three order types may carry the Non-Display Remove Modifier: a Non-Displayed Limit Order, an MPL Order designated Day, and a Non-Routable Limit Order.

An order so designated trades as the liquidity-taking order with an Aggressing ALO Order or MPL-ALO Order on the other side that has a working price equal to its own working price.

The Non-Routable Limit Order branch adds one qualifier that the other two do not carry: the match is on the order's working price, but not display price.

It is not the only modifier these types take. A Non-Displayed Limit Order, an MPL Order and a Tracking Order are three of the six order types that may carry the Minimum Trade Size Modifier, covered in the lesson on equity order types and modifiers.

Exam Tip: Gotchas

• The modifier reverses which side removes liquidity. A resting order that carries it becomes the liquidity taker against an aggressing liquidity-adding order at the same working price, which is what lets the two meet at all.

What Should You Check on Exam Day?

• On a Reserve Order, separate the two clocks. Each replenished display quantity takes a new working time; the reserve interest keeps the original entry time.
• Check the direction of a cancellation or a routing decision. Both start with the reserve interest, and among child orders the later working time goes first.
• For a Non-Displayed Limit Order, compare the limit price with the protected quote before naming the working price.
• For a Mid-Point Liquidity Order, ask whether the protected quote exists and is unlocked. The plain version waits; the immediate-or-cancel version is rejected.
• For a Tracking Order, test all three trigger conditions on the contra-side order, then give it that order's entire unexecuted quantity.