Intermarket Sweep Orders

Two of the order protection exceptions run on this order type, one for the venue that sends the sweep and one for the venue that receives the marked order. The receiving venue's exception runs on an order identified as an intermarket sweep order; the sending venue's runs on actually routing a sweep against the full displayed size of every protected quotation it trades through.

The definition is where the exam separates a marked order from a qualifying one. Marking is only the first of two requirements.

What Makes an Order an Intermarket Sweep Order?

An intermarket sweep order (ISO) is a limit order for a national market system (NMS) stock that meets both of these requirements:

• When routed to a trading center, the limit order is identified as an intermarket sweep order
• Simultaneously with that routing, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or of any protected offer, in the case of a limit order to buy

Those target quotations are the ones for that NMS stock priced superior to the limit price of the order identified as an intermarket sweep order.

The rule adds one more sentence to the second requirement: those additional routed orders also must be marked as intermarket sweep orders.

Exam Tip: Gotchas

• An intermarket sweep order is by definition a limit order. A market order cannot be one, because the second requirement is measured against the limit price of the order being identified.
• Marking alone does not make an order an intermarket sweep order. The simultaneous routing of the accompanying orders is a second requirement, so an order carrying only the label fails the definition.
• The accompanying orders carry the same mark. The rule requires the additional routed orders to be marked as intermarket sweep orders too, so an unmarked companion order breaks the set.

Which Protected Quotations Must the Accompanying Orders Reach?

The accompanying orders are aimed at the protected quotations priced better than the sweep's own limit price, and at their full displayed size:

• For a limit order to sell, the target is any protected bid at a price superior to the sweep's limit price
• For a limit order to buy, the target is any protected offer at a price superior to the sweep's limit price

The phrase "as necessary" is doing real work. Where no protected quotation is priced better than the sweep's limit, no additional order is needed for the requirement to be met.

The size standard is displayed size. A quotation's undisplayed or reserve interest is not what the accompanying orders have to reach.

Exam Tip: Gotchas

• The sweep aims at better-priced quotations, not at every protected quotation. Only protected bids or offers superior to the sweep's own limit price have to be swept, which is why the more aggressive the limit price, the more quotations sit superior to it and the more companion orders the second requirement calls for; a limit price with nothing superior to it needs none.
• Full displayed size is the measure. Routing an order for part of a protected quotation's displayed size leaves the second requirement unmet, and with it the exception the sweep was meant to support.

Who Must Establish That the Order Qualifies?

The trading center, broker, or dealer responsible for the routing of an intermarket sweep order must take reasonable steps to establish that the order meets the definition's requirements.

Two features of that duty are testable. It sits on the router, not on the venue that receives the marked order, and the standard is reasonable steps to establish, not certainty.

Exam Tip: Gotchas

• The receiving venue is not the one that has to verify the sweep. The duty to take reasonable steps falls on the trading center, broker or dealer responsible for routing the order.
• The standard is reasonable steps rather than a guarantee. A router that took reasonable steps has met this paragraph even where a companion order later turns out to have missed its target.

What Should You Check on Exam Day?

• Confirm the order is a limit order in an NMS stock before treating it as an intermarket sweep order.
• Look for both requirements: the identification when routed, and the simultaneous routing of the additional limit orders as necessary.
• Check that the companion orders target the full displayed size of protected quotations priced superior to the sweep's own limit price.
• Confirm the companion orders are themselves marked as intermarket sweep orders.
• Put the reasonable-steps duty on the party responsible for routing, not on the receiving trading center.