Brokers and filling illegal orders

johnnyc · Sep 23, 2009

Quote from dagnyt:

No he cannot

The MM cannot reject the order. Where do you get such ideas?

The MM is not supposed to see the customer order, unless it cannot be instantly filled when it reaches the pit.

The MM is filled electronically because the offer is lower than the bid and that's that.

Mark

sure he can. If the ASK was 14, and he submitted a buy order @ 16(which would get displayed as the BID) that would cross the market by making it BID 16/ASK 14. Several of the routers the destinations use to send out orders to the exchange do this automatically.

if you think the chx is alone in this, you're kidding yourself.

http://www.chx.com/content/Trading_Information/matchingsys.html

If the orderâs price would lock or cross the NBBO then the order will be rejected.

Here's the reject message in the fix log which is the code most everyone uses to send orders

4B21 Cannot Lock/Cross NBBO

http://www.404.gov/rules/other/nasdaqllcf1a4_5/e_nasdaqfix.pdf

MTE · Sep 23, 2009

Quote from johnnyc:

sure he can. If the ASK was 14, and he submitted a buy order @ 16(which would get displayed as the BID) that would cross the market by making it BID 16/ASK 14. Several of the routers the destinations use to send out orders to the exchange do this automatically.

if you think the chx is alone in this, you're kidding yourself.

http://www.chx.com/content/Trading_Information/matchingsys.html

If the orderâs price would lock or cross the NBBO then the order will be rejected.

Here's the reject message in the fix log which is the code most everyone uses to send orders

4B21 Cannot Lock/Cross NBBO

http://www.404.gov/rules/other/nasdaqllcf1a4_5/e_nasdaqfix.pdf

If the ask is 14 and you send a buy limit at 16 then your order is a marketable limit order and will be filled at 14. If your size is greater than that available at 14 then you will move up the book until you are filled or hit 16.

While I'm no expert in technology underlying the exchange, my guess the order won't even display as 16 bid, as it would be a defacto market order.

dagnyt · Sep 23, 2009

Quote from MTE:

If the ask is 14 and you send a buy limit at 16 then your order is a marketable limit order and will be filled at 14. If your size is greater than that available at 14 then you will move up the book until you are filled or hit 16.

Correct.

Imagine what would happen if the order were rejected and by the time the customer can be notified, the price is back up to 18.

Who would be willing eat the error for not filling the order? No one on this planet.

Mark

krazykarl · Sep 23, 2009

Quote from alexandercho:

How far can a broker fill an order away from your limit price before it is considered illegal in terms of percent? Is their any set standard the SEC regulates?

Oh for fuck sakes....

johnnyc · Sep 24, 2009

Quote from MTE:

If the ask is 14 and you send a buy limit at 16 then your order is a marketable limit order and will be filled at 14. If your size is greater than that available at 14 then you will move up the book until you are filled or hit 16.

While I'm no expert in technology underlying the exchange, my guess the order won't even display as 16 bid, as it would be a defacto market order.

Does the order cross the NBBO? Did you view the link to the CHX site? See the error message in the FIX guide? They put that information out there for a reason, primarily because the regulators want to attempt to protect client's that don't know what they are doing from entering stupid orders like the OP did.

I spent some time working on an agency desk and saw countless orders get rejected for this reason. Some that stand out were the PHLX world currency options. Some newsletter guy would tell people to buy some XCD calls up to like 2.00, and the calls were trading at like .50, well these sheep that followed the newsletter would all put their buy orders in at 2.00 and the orders would get rejected, reason being price too aggressive, crosses NBBO.

Not saying I agree with this happening but it can and does happen on a daily basis.

johnnyc · Sep 24, 2009

Quote from dagnyt:

Correct.

Imagine what would happen if the order were rejected and by the time the customer can be notified, the price is back up to 18.

Who would be willing eat the error for not filling the order? No one on this planet.

Mark

It's really not that different than somebody that places a buy stop below the BID or sell stop above the ASK (reverse this for equity orders), do you think those just get banged out at the market? Nope they get rejected.

Clearly an error for placing a marketable stop order, right? The error is on the person that placed the order, even if the position moves against them later it does not change the fact that an invalid order was entered, and the same could technically be said of OP's order which could be viewed as an attempt to cross the market, right?

Mind you I'm not saying that I think that is what should have happened with OP's order, just pointing out what could have happened...

MTE · Sep 24, 2009

Quote from johnnyc:

Does the order cross the NBBO? Did you view the link to the CHX site? See the error message in the FIX guide? They put that information out there for a reason, primarily because the regulators want to attempt to protect client's that don't know what they are doing from entering stupid orders like the OP did.

I spent some time working on an agency desk and saw countless orders get rejected for this reason. Some that stand out were the PHLX world currency options. Some newsletter guy would tell people to buy some XCD calls up to like 2.00, and the calls were trading at like .50, well these sheep that followed the newsletter would all put their buy orders in at 2.00 and the orders would get rejected, reason being price too aggressive, crosses NBBO.

Not saying I agree with this happening but it can and does happen on a daily basis.

I did look at the link, but it's not all that clear what that rule is designed to do and in which case (I don't know, maybe I'm just too dumb to understand the rules).

Link or no link, I stand by what I've written. However, I'm not claiming to be the most knowledgable guy on the planet so if you can prove me wrong I would be glad to learn something new.

Here's a link from amex describing a marketable limit order. Note that it says:
"equal to or greater than the current offer in the market or...equal to or less than the current bid".

Here's another link from NYSE Arca options. Read what it says under "limit order":
"Marketable Limit Orders that cannot be filled in their entirety at the NBBO on NYSE Arca will be routed to other exchanges. Any unfilled portion of the order will not be routed to the next best price level until all quotes at the current best bid or offer are exhausted. If the order is no longer marketable it will be ranked in the NYSE Arca Book."

In other words, there's nothing to suggest that a limit order with a limit above/below the current NBBO will be rejected. To the contrary, the process it describes is precisely what I've written.

johnnyc · Sep 24, 2009

Quote from MTE:

I did look at the link, but it's not all that clear what that rule is designed to do and in which case (I don't know, maybe I'm just too dumb to understand the rules).

Link or no link, I stand by what I've written. However, I'm not claiming to be the most knowledgable guy on the planet so if you can prove me wrong I would be glad to learn something new.

Here's a link from amex describing a marketable limit order. Note that it says:
"equal to or greater than the current offer in the market or...equal to or less than the current bid".

Here's another link from NYSE Arca options. Read what it says under "limit order":
"Marketable Limit Orders that cannot be filled in their entirety at the NBBO on NYSE Arca will be routed to other exchanges. Any unfilled portion of the order will not be routed to the next best price level until all quotes at the current best bid or offer are exhausted. If the order is no longer marketable it will be ranked in the NYSE Arca Book."

In other words, there's nothing to suggest that a limit order with a limit above/below the current NBBO will be rejected. To the contrary, the process it describes is precisely what I've written.

Do you really believe that $2 above the ASK should be considered a "marketable limit order" ? I hope you never make a typo when placing a trade. When I think of a marketable limit order, I'm thinking like maybe .50 above the ASK tops. To me and several routing destinations $2.00 above the ASK is either an attempt to cross the market or an obvious error. But looks like we'll just have to agree to disagree on that.

Anyways, here's a couple more supporting docs if you're interested:

section IV:

Each of the maker-taker options markets (NYSE Arca and NOM) have
implemented automated systems that utilize specific logic to reject orders that would lock or cross
the market for an options class listed on those exchanges. As such, if locked or crossed markets are
more prevalent in the options markets, they are only being caused by market makers on the
traditional exchanges which do not systemically prevent locked or crossed markets.

http://www.getcollc.com/images/uploads/getco_comment_090208.pdf

Crossing the Market
Orders that would cross the consolidated market are slid or rejected depending upon the request of the subscriber.

http://www.batstrading.com/subscriber_resources/BATS_Subscriber_Manual.pdf

Here's an older letter IB wrote to SEC about the CBOE wanting to deny autoex customer orders that lock/cross the NBBO

http://www.interactivebrokers.com/e...etters/COMMENT_LETTER_ON_CBOE_99-61-FINAL.pdf

spindr0 · Sep 24, 2009

Quote from johnnyc:

Do you really believe that $2 above the ASK should be considered a "marketable limit order" ? I hope you never make a typo when placing a trade. When I think of a marketable limit order, I'm thinking like maybe .50 above the ASK tops. To me and several routing destinations $2.00 above the ASK is either an attempt to cross the market or an obvious error. But looks like we'll just have to agree to disagree on that.

I don't know what the rules are but I have placed that questionable order a few times (for stock) when the B/A straddles a round dollar amount and I mistakenly didn't correct the price.

For example, B/A is 15.95 x 16.05 and I'm buying. I want to be 1st in line but I don't want to pay the ask (15.96). I click ask box to buy, order opens with 16.05 price and I change 05 to 96 but carelessly fail to change 16 to 15 so price goes in to buy at 16.96

IB flags this order since it violates a percentage difference away from current price. I don't know what the % limit is. I have no clue if it's an IB or a market rule but I'm glad they do - rather than submitting the bad order they ask you if you really want to place such an order. Don't know if this is the same with options.

johnnyc · Sep 24, 2009

Quote from spindr0:

I don't know what the rules are but I have placed that questionable order a few times (for stock) when the B/A straddles a round dollar amount and I mistakenly didn't correct the price.

For example, B/A is 15.95 x 16.05 and I'm buying. I want to be 1st in line but I don't want to pay the ask (15.96). I click ask box to buy, order opens with 16.05 price and I change 05 to 96 but carelessly fail to change 16 to 15 so price goes in to buy at 16.96

IB flags this order since it violates a percentage difference away from current price. I don't know what the % limit is. I have no clue if it's an IB or a market rule but I'm glad they do - rather than submitting the bad order they ask you if you really want to place such an order. Don't know if this is the same with options.

That sounds like an IB policy since they're giving you the choice of whether or not you really want to place the order. It's in their best interest to do so. You're their customer and they want to protect you, keep you there, and keep you trading. Even if the error is 100% the client's fault, that doesn't mean their compliance department isn't going to get a call and they won't end up in arbitration which is time consuming and can be costly. I'm not familiar with IB, but I would expect it to be the same for options since it sounds like they're using a % compared to the quote. The more responsible firms and routing destinations have a feature like this programmed into their software and routers.