Quick Answer
These standards set the minimum price improvement a member needs to execute an order on a proprietary basis while holding an unexecuted limit order in that same security, and not be required to execute the held limit order. The amount is set in seven branches keyed to the customer limit order's price.
The standards answer a narrow question. They do not say when a member may trade; they say how far away from the held limit order's price the member has to be before the trading ahead of customer orders rule stops requiring it to fill that order.
How Much Price Improvement Does Each Price Band Require?
Six branches run by the customer limit order's price, and a seventh covers an order priced outside the best inside market. The top branch splits by product, so two definitions matter before you read the table.
An NMS stock is any national market system (NMS) security other than an option. An OTC equity security is an equity security that is not an NMS stock, and it does not include a restricted equity security.
| Customer limit order price | Minimum price improvement required |
|---|---|
| $1.00 or more | $0.01 for NMS stocks, and the lesser of $0.01 or one-half of the current inside spread for OTC equity securities |
| At least $0.01 but below $1.00 | The lesser of $0.01 or one-half of the current inside spread |
| At least $0.001 but below $0.01 | The lesser of $0.001 or one-half of the current inside spread |
| At least $0.0001 but below $0.001 | The lesser of $0.0001 or one-half of the current inside spread |
| At least $0.00001 but below $0.0001 | The lesser of $0.00001 or one-half of the current inside spread |
| Below $0.00001 | The lesser of $0.000001 or one-half of the current inside spread |
| Priced outside the best inside market | Either the requirements above are met, or the member trades at a price at or inside the best inside market for the security |
Exam Tip: Gotchas
- One penny is not the answer everywhere at or above $1.00. The top band is a flat $0.01 for an NMS stock, but for an OTC equity security it is the lesser of $0.01 or one-half of the current inside spread, which in a tight market is less than a penny.
- Every band below the top one is a "lesser of" test. The named increment is a ceiling, and a narrow inside spread pulls the required improvement below it.
- The out-of-market branch offers two routes, not one. A member can meet the improvement figures, or it can trade at a price at or inside the best inside market, and the rule joins them with "either" and "or."
How Is the Inside Spread Calculated When None Is Published?
The rule provides a calculation route for customer limit orders in OTC equity securities priced below $1.00 where there is no published current inside spread. Members may calculate a current inside spread by contacting and obtaining priced quotations from at least two unaffiliated dealers, then using the highest bid and lowest offer obtained.
Where there is only a one-sided quote in an OTC equity security priced below $1.00, members may use the same method and take the best price obtained on the other side of the quote.
Members must document the name of each dealer contacted and the quotations received for purposes of determining the current inside spread.
Exam Tip: Gotchas
- The calculation route is permissive and the documentation duty is not. Members "may" calculate a spread this way, and members "must" document each dealer contacted and the quotations received.
- The route is scoped to one population. It is written for customer limit orders in OTC equity securities priced below $1.00 with no published current inside spread, so it is not a general substitute for a published quotation.
- Two unaffiliated dealers is a floor. The rule says at least two, and it says unaffiliated, so quotations gathered inside an affiliated group do not build the spread.
Which Other Limit Orders Get Pulled In?
If the minimum price improvement standards would trigger the protection of a pending customer limit order, any better-priced customer limit order or orders must also be protected under the rule, even if those better-priced limit orders would not be directly triggered under the standards.
That sentence reaches orders the arithmetic never touched. Once one held limit order is protected, everything priced better than it is protected alongside it.
Exam Tip: Gotchas
- A better-priced order can be protected without qualifying on its own. The rule protects it precisely because a worse-priced order was triggered, which is the reverse of the intuition that the closest order is the only one at issue.
- The spill-over runs one way. It reaches better-priced customer limit orders, so an order priced worse than the triggered one is not pulled in by this sentence.
What Should You Check on Exam Day?
- Read the customer limit order's price first, then pick the band; the bands are set by that price, not by the stock's trading price.
- On an order at or above $1.00, ask whether the security is an NMS stock or an OTC equity security before answering with a penny.
- In every band below the top one, compare the named increment against one-half of the current inside spread and take the lesser.
- On an order priced outside the best inside market, check the second route: trading at or inside the best inside market also satisfies the standard.
- After finding one protected limit order, look for better-priced customer limit orders that must be protected alongside it.