TWS Order Type: Pegged to ask unless dips 1% from close?

[Love2Trade$]

https://www.sec.gov/spotlight/emsac/memo-rule-611-regulation-nms.pdf

A trade-through is defined as the purchase or sale of an “NMS stock” during “regular trading
hours” (9:30 a.m. to 4:00 p.m. ET), either as agent or principal, at a price that is lower than a
protected bid or higher than a protected offer. An NMS stock generally means any exchange-listed security (other than listed options) for which consolidated market data is disseminated.

I read through your link and I'm a little confused. Sorry if these answers should be obvious. I am really trying to nail down the specifics of order execution. Any clarification you give is appreciated. Thanks @Robert Morse!

1. So in extended hours sessions, limit orders are NOT protected against trade-throughs?
2. In regular session: Do attributes (hidden vs. lit / smart vs. direct routed) affect the protection rights of a limit order?
3. How come trade throughs still happen if they are illegal (during RTH sessions assuming all requirements met)?

 

[Robert Morse]

I read through your link and I'm a little confused. Sorry if these answers should be obvious. I am really trying to nail down the specifics of order execution. Any clarification you give is appreciated. Thanks @Robert Morse!

1. So in extended hours sessions, limit orders are NOT protected against trade-throughs?
2. In regular session: Do attributes (hidden vs. lit / smart vs. direct routed) affect the protection rights of a limit order?
3. How come trade throughs still happen if they are illegal (during RTH sessions assuming all requirements met)?

I do not claim to be an expert on this, that is why I quoted the SEC. There might be further regs I could not find. Given that, this is what I expect?

#1. I think you are but there are a number of exemptions, but I can't find the specific rule.
#2. Only orders placed on a lite exchange are protected. That means hidden order that can't be seen by another ECN can't be protected, same with dark pools. Every SMART route is different, but until it hits a lite exchange it is not represented in the market place. DMA is sent to a lite exchange by definition. Once it is there, you have protection.
#3. There are exemptions to the rule. See - B. Exceptions to Rule 611.

Again, not my expertise. I try to focus on the market structure items I have control over like order management to find liquidity, cost management, market impact etc.

 

[Love2Trade$]

@Robert Morse - Thanks so much for the thoughtful detailed reply! Understood not your expertise, I will dig around if I have any follow-up q's. What you said clarified most of what I was confused about so thanks a lot!

 

[qlai]

How come trade throughs still happen if they are illegal (during RTH sessions assuming all requirements met)?

Your order is only protected up to the displayed size of the NBBO. For example, you send a buy order to Nasdaq for 1000 shares. The Best Offer is for 100 shares at NYSE and 200 at Edgex. Nasdaq must route 100 to NYSE and 200 to Edgex. However, the remaining 700 are not protected and will most likely execute at worse price. In time and sales you will see these shares as 'F' (ISO) which means they are trade through exempt. There are other exceptions, but this is the most common case.

 

[Love2Trade$]

Pegged orders are usually non display ... Otherwise they would themselves cause bbo changes. But I am not sure what IB is doing.

Hi @qlai - Is there a difference between non-displayed and hidden? I ask b/c when I select REL order types they do not display as hidden (hidden checkbox unselected & "iceberg" showing in the column where hidden normally would be listed) - see attached order ticket pics. Thank you!

 

[Love2Trade$]

Your order is only protected up to the displayed size of the NBBO. For example, you send a buy order to Nasdaq for 1000 shares. The Best Offer is for 100 shares at NYSE and 200 at Edgex. Nasdaq must route 100 to NYSE and 200 to Edgex. However, the remaining 700 are not protected and will most likely execute at worse price. In time and sales you will see these shares as 'F' (ISO) which means they are trade through exempt. There are other exceptions, but this is the most common case.

Oh wow excellent example, I would have never thought about this, thanks @qlai !

 

[qlai]

Is there a difference between non-displayed and hidden?

Not for the purpose of your question. Pegged order should always be hidden/non-display. Otherwise, it itself will cause BBO change and will chase itself to the opposite side. The only exception may be zero offset since you are joining BBO. Some exchanges support pegged orders and some don't, so I don't know how IB handles it.

I think it would be easier if you mentioned what is it you are trying to accomplish and/or avoid. For example, below statement is throwing me off:

In regular session: Do attributes (hidden vs. lit / smart vs. direct routed) affect the protection rights of a limit order?

Pegged orders are passive order so they don't need protection. Aggressive (marketable) orders are protected ... They are guaranteed the NBBO or better up to the displayed size.

 

[Love2Trade$]

Hi @qlai - Thanks for the detailed clarification, what you said makes sense about the pegged orders. Sorry for the confusion. The thread began about how to accomplish a certain task with the given order types IB has available. I am looking for the characteristics of the order type I described b/c I noticed in extended hours sessions others would often get filled before me even though my limit price was better (more aggressive). So I thought that one of the things that might have been happening were trade throughs. That led to me learning about the multiple reasons why my order may not have been filled even though I had the best price. The latest questions I asked you above were related to that concept of trade throughs - I was trying to figure out if I was not getting filled b/c of trade throughs due to the characteristics of orders I commonly use (hidden, smart, partial lots). Hope that makes sense and thanks!

 

[cruisecontrol]

Pegged orders are passive order so they don't need protection. Aggressive (marketable) orders are protected ... They are guaranteed the NBBO or better up to the displayed size.

Actually the wording of the order protection rule is that it is quotations (limit orders) which are protected, not marketable orders - though logically if one is protected then so is the other. Only visible limits are protected as hidden orders cannot become NBBO.

 

[Love2Trade$]

Thanks @cruisecontrol!

1. What exactly are marketable orders? I understand them to be orders within reason from the current last sale price & they can be limit or market orders. Is this correct? Is there a more precise definition (like a certain % away from last price, only limit orders not market orders, etc)?