New order behavior - is it due to IB or INET?

Quote from sprstpd:

I am talking pre and post-market trading on listed stocks here. Previously, the uptick rules on ARCA and INET in pre and post-market trading have been something like this:

Initially on both ECNs, you can't short at a price less than the previous close for listed stocks. So in my HAL example, the previous close (from the previous day) was something like 82.80. If you tried to submit a short order at 82.79, it would be repriced to 82.80 on both ECNS. No matter what happens during the pre or post-market trading session, this rule is always in effect for listed stocks that have uptick restrictions. (NASDAQ stocks are entirely different - you can short without an uptick on both ARCA and INET and you can short at any price you want, even below the close).

ARCA:
Once a print goes off higher than the close, then you can't short at a price lower than that print. So in the HAL example, a print goes off at 83.65 on ARCA. I can't short at 83.64, my order gets modified to display ay 83.65. Now if someone hits the 83.64 with a sell order, then I am now able to short at 83.64. It is an uptick rule based on the last pre or post-market print on ARCA.

INET:
Previously, I could short down to 82.80 (i.e., the previous close) on INET for the whole pre or post-market even if there were prints going off much higher. In other words, INET previously only had one restriction: you can't short lower than the previous close.

Again, this new behavior I am seeing only applies to pre or post-market trading. Right now, it seems that ARCA's last print is effecting what kind of order I can submit to INET and have it display properly. My order doesn't seem to exist if I attempt to cross/match the market. Is it an INET issue? Or is it an IB issue? If it is an IB issue, please fix - it is aggravating.
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We have not changed the software for quite some time, but if you PM an order number that you suspect, we will have a look what happened.

BTW, pre- and post- regular trading has different rules. I think (at least in some cases) the tick test is performed against the closing price.
 
Quote from IBsoft:

When routing orders to INET IB enforces the "don't sell short on downtick" rule. (We have always done that; I will verify w/ compliance whether we still need to do so). This means that we raise the sell order price to be 1 tick above the bid for NASDAQ stocks and make it equal to or above the last sale price for the listed stocks.

For ARCA we don't do that, as ARCA does its own rule enforcement.

All I need is one example that you think we mishandled and we'll have a look.

Thanks.
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The orders happen in pre and post-market. At least before, INET and ARCA have had totally separate uptick rules in extended hours trading.

I am not sure IB has mishandled the order. It could be that INET will not even show an order that crosses or matches ARCA in pre-market, but it just started happening this week. I will send you a PM with an order I sent this morning which went active, but was not visible anywhere in any of my quote sources (direct to INET).
 
the below may or may not have something to do with this discussion.



INET is migrating its trade reports in Nasdaq-listed securities from the National Stock Exchange (NSX) to NASDAQ’s Trade Reporting System, ACT. As a result, short sale orders on INET in NASDAQ-listed securities are subject to NASD Rule 3350, i.e., the "bid-tick" rule. INET expects the migration of trade reports to be complete by Monday, January 23, 2006.
 
January 18, 2006


AUDIENCE
All INET Subscribers


SUMMARY
Effective Monday, January 23, 2006, all INET order entry ports will be enabled for short sale checking.


WHAT DOES THIS MEAN?
Effective Monday, January 23, 2006, short sale checking will be enabled on all INET order entry ports.

Please note that INET will continue to exempt Reg SHO pilot securities from short sale rules, as applicable. In addition, orders entered as "short-sale exempt", per NASD Rule 3350, will not be subject to INET’s short-sale checking feature.


WHY ARE YOU DOING THIS?
As previously announced, in the email to subscribers on January 10, 2006, INET is migrating its trade reports in Nasdaq-listed securities from the National Stock Exchange (NSX) to NASDAQ’s Trade Reporting System, ACT. As a result, short sale orders on INET in NASDAQ-listed securities are subject to NASD Rule 3350, i.e., the "bid-tick" rule. INET expects the migration of trade reports to be complete by Monday, January 23, 2006.


WHAT DO I HAVE TO DO?
You do not have to do anything in order for the short sale feature to be enabled on your INET order entry port on Monday, January 23, 2006. However, if you have internal short sale checking systems, INET advises that you enable them by this date.


QUESTIONS
If you have any questions, please contact your sales representative at 800.846.0477, or sales@nasdaq.com.


Thank you,
INET
Member NASD/NSX/SIPC
 
April 7, 2006


AUDIENCE
All INET Subscribers


SUMMARY
INET is in the process of representing orders at the top of the INET book, i.e., its Best Bid and Offer (BBO), in the National Market System for securities listed on the NYSE, Amex and regional exchanges. INET currently represents its quotes for some securities through either the NASDAQ Market Center or the National Stock Exchange (NSX).

On Monday April 10, 2006, INET will represent its BBO in the National Market System for all securities listed on the NYSE, Amex and regional exchanges. The display of quotes will use the following guidelines:

* New York Stock Exchange (NYSE)-listed securities will be represented via the National Stock Exchange (NSX) as “C”.
* American Stock Exchange (Amex)-listed securities and securities listed on regional exchanges will be represented via the NASDAQ Market Center (NASDAQ). INET will be represented by the Market Participant ID (MPID) “INET” in the CQS data feed. The best quote from the NASDAQ Market Center will continue to be represented as “T” and will now include INET in its calculation.

Please note that while INET will represent all securities in the National Market System on April 10, 2006, those securities that are already represented in the National Market System that are not in accordance with the above guidelines will be transitioned to conform with these guidelines in the coming weeks. The Semiconductor HOLDRS Trust, represented as “SMH”, will be the first symbol to migrate. It will be quoted to NASDAQ beginning Monday, April 3, 2006.

For complete INET book data, we recommend INET subscribers use the ITCH data feed.

Please note that as a result of INET's decision to display orders in the official Consolidated Quote, all orders and executions are subject to trade-through prohibitions. To better understand the implications of the trade-through rule, please review the brief examples in this notice.


WHAT DOES THIS MEAN?
INET’s BBO in NYSE- and Amex-listed securities will be represented in the Consolidated Quote as follows:

* All NYSE-listed securities, including NYSE-listed Exchange Traded Funds (ETFs), will be represented via the NSX as “C”.
* All Amex-listed securities, including Amex-listed ETFs, will be represented via NASDAQ.

WHAT DO I HAVE TO DO?
If you rely on the Consolidated Quote for INET data, orders on INET will be displayed using the following guidelines; you should adjust your routers accordingly:

* NYSE-listed securities will be represented via the NSX by “C”.
* Amex-listed securities will be represented via NASDAQ. INET will be represented by the MPID “INET” in the CQS data feed. The best quote from the NASDAQ Market Center will continue to be represented by “T” and will now include INET in its calculation.

You do not have to do anything to support this change if you currently rely on the ITCH data feed for INET data.


HOW DOES THE TRADE-THROUGH RULE AFFECT MY TRADING?
As a result of the trade-through rule, the INET system will check prices before and after order entry to ensure compliance with the trade-through rule. Below is a description of these checks.

Order entry - At the time of order entry, every order will be checked to ensure that it does not lock or cross the market or cause an execution at a price that would constitute a violation of the trade-through rule. If an order locks the market, it will be turned into a non-display order so as not to quote a locked market. If an order crosses the market or would cause a trade-through violation, it will be re-priced to the current low offer (for bids) or to the current best bid (for offers) and turned into a non-display order so as to not quote a locked market. Any non-display order that crosses the market will be re-priced to the current low offer (for bids) or to the current best bid (for offers).

Example:
The National Best Bid in IWO is $77.55.
An INET subscriber enters an order to sell at $77.54.
The INET system will automatically re-price the order to $77.55 and change it to non-display.

Post-order entry - An order entered for display will not be affected by the trade-through rule after it is accepted. A non-display order, however, may be canceled from the INET book with the reason code “#DNT” if the market moves through the order after the order is accepted to prevent trade-throughs.

Example:
The National Best Bid in IWO is $77.55.
An INET subscriber enters a non-display order to sell at $77.55.
The National Best Bid in IWO becomes $77.56.
The non-display order to sell at $77.55 will be canceled with the reason code “#DNT” since it cannot be executed without causing a trade-through violation.


WHERE WILL INET DISPLAY ITS QUOTE IN NYSE-LISTED SECURITIES?
INET will represent its BBO in NYSE-listed securities, including NYSE-listed ETFs, via the NSX. In addition, the entire INET book will continue to be available through the ITCH data feed.


WHERE WILL INET DISPLAY ITS QUOTE IN AMEX-LISTED SECURITIES?
INET will represent its BBO in Amex-listed securities, including Amex-listed ETFs, via NASDAQ. In addition, the entire INET book will continue to be available through the ITCH data feed.

Please note that while INET will represent all securities in the National Market System on April 10, 2006, those securities that are already represented in the National Market System that are not in accordance with the above guidelines will be transitioned to conform with these guidelines in the coming weeks. The Semiconductor HOLDRS Trust, represented as “SMH”, will be the first symbol to migrate. It will be quoted to NASDAQ beginning Monday, April 3, 2006.


WHEN WILL INET DISPLAY ITS BBO IN ALL SECURITIES?
INET expects to display its BBO in all securities by Monday, April 10, 2006.


QUESTIONS
If you have any questions, please contact your sales representative at 800.846.0477 or sales@nasdaq.com.

Thank you,
INET
Member NASD/NSX/SIPC





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I hope the following explains things.

INET now automatically enforces short-sale restrictions. If a broker redundantly seeks to enforce them as well, the broker's redundant short-sale checks will be substantially slower and less accurate than INET's processing, and will therefore wrongfully block executions which should have been permitted.

INET will not display any order, for stock listed on NYSE, AMEX, or regionals, which will lock another market, that is, display a bid matching another market's offer, or display an ask matching another market's bid. INET will instead convert such an order into a non-displayed (hidden) order, one which sits on the INET book, and is executable, but which does not display as a quote to the marketplace. If another market center's opposing quote moves through such a hidden order, then INET will cancel and reject the hidden order.
 
Quote from jimrockford:

I hope the following explains things.

INET now automatically enforces short-sale restrictions. If a broker redundantly seeks to enforce them as well, the broker's redundant short-sale checks will be substantially slower and less accurate than INET's processing, and will therefore wrongfully block executions which should have been permitted.

INET will not display any order, for stock listed on NYSE, AMEX, or regionals, which will lock another market, that is, display a bid matching another market's offer, or display an ask matching another market's bid. INET will instead convert such an order into a non-displayed (hidden) order, one which sits on the INET book, and is executable, but which does not display as a quote to the marketplace. If another market center's opposing quote moves through such a hidden order, then INET will cancel and reject the hidden order.
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Ok, this explains my issue perfectly. Thanks for the research. By the way, this new behavior really sucks.
 
I apologize to IB for insinuating that they weren't routing correctly. As per jimrockford's posts, it is an INET problem. Now getting short on listed stocks in pre-market got tons harder mainly due to ARCA's stupid uptick rules.
 
Who is benefitting from these convoluted rules? The MM's?

I love orders being auto cancelled, saves me tons of commissions.
 
I believe the new rules are designed to pave the way for the upcoming effective date of the new trade-thru rule (Regulation NMS). Small traders will benefit under the new rules, because they will allow electronic executions to trade-thru non-auto-ex specialist quotes. This will deprive specialists of the ability to paralyze and to delay electronic market centers by displaying bogus unexecutable specialist quotes. This, in turn, will undermine much of the monopoly advantage tending to confine liquidity to the specialists, and so facilitate a shift in liquidity away from specialists and toward electronic venues; and this will further benefit small traders.

It is true that ECNs will sometimes cancel and reject orders. This is one reason why small traders need access to automated order routing software, like IB's SMART order router, to automatically reprice and resubmit rejected orders, and this is why IB should shift its priorities so as to keep its SMART router up to date so that it changes with changing market rules.
 
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