Understanding NASDAQ Order Routing
Equity Trader Examination
Order Entry Parameters
A system order is entered in the NASDAQ system for display or execution. All orders must indicate a limit price and if the order is to buy, sell or sell short the security for which the order is entered. System orders may be designated with the following time in force parameters:
- Market Hours Immediate or Cancel (MIOC) 9:30 AM – 4:00 PM EST
- Market Hours Good-till-Cancelled (MGTC) 9:30 AM – 4:00 PM EST
- Market Hours Day (MDAY) 9:30 AM – 4:00 PM EST
- System Hours Expire Time (SHEX) Expires at a stated time
- System Hours Immediate or Cancel (SIOC) 7:00 AM – 8:00 PM EST
- System Hours good-till-Cancelled (SGTC) 7:00 AM – 8:00 PM EST
- Good-till-Market Close (GTMC) 7:00 AM – 8:00 PM EST
The Order Routing Process
Orders entered by market participants will be routed by the NASDAQ system from 7:00 AM to 8:00 PM EST. All orders entered into the NASDAQ system are governed by Regulation NMS. The following order routing types are non routable NASDAQ only orders:
Intermarket Sweep Order (ISO) – orders entered as intermarket sweep orders will be executed at the best price displayed in the NASDAQ system and will not be routed to any other market for execution. Firms entering ISO orders must have checked prices in other market centers to ensure better prices are not available.
Price to Comply Order – orders entered as price to comply orders that lock or cross an external market will automatically be adjusted by the NASDAQ system to comply with the locked and crossed market rules of regulation NMS. Buy orders entered at a price above the lowest offer will be adjusted to the price of the lowest offer. Orders to sell entered at a price below the highest bid will be adjusted to the price of the highest bid. If the market changes to cause the adjusted to again lock or cross the market the order will be cancelled.
Minimum Quantity Orders – orders entered in the NASDAQ system that specify a minimum number of shares to be executed or cancelled may only be entered as market hours immediate or cancel or as system hours immediate or cancel. Market hours IOC orders may not be entered prior to the opening cross or after the closing cross.
Firms may also enter orders in the NASDAQ system that may be sent to other markets for execution. Orders that may be routed to other markets include:
SCAN Order – this order routing type will first try to execute the order in the NASDAQ system at a price better than the NBBO if the order is not executed it will then route the order to other markets for execution. If any portion of the order is not filled after being routed to other markets it will be returned to the NASDAQ system and be posted in the NASDAQ book. Once posted to the NASDAQ book the order will not be rerouted if the order subsequently locks or crosses an external market.
Reactive Electronic STGY Order – This order acts as a SCAN order, however the order will reroute after it is posted to the NASDAQ book if another market locks or crosses the order.
Aggressive Electronic SPDY Order – limit orders entered as SPDY orders will reroute like STGY orders. Market orders entered as SPDY orders will track the inside market on the same side of the market for which the order is entered. SPDY market orders to buy will track the highest bid while SPDY market orders to sell will track the inside offer.
A pegged order is an order entered through NASDAQ which is designed to track the inside market of the stock for which it is entered for execution. A pegged order may be entered as a primary peg, as a mid point peg or as a market peg. A primary peg order to buy will track the best bid, while a primary peg order to sell will track the offer. A mid point peg order to buy or sell will track the mid point of the spread between the best bid and offer. A market peg order to buy will track the offer and a market peg order to sell will track the bid. As the market for the stock changes the pegged order will automatically adjust to track the market until the order is filled. All pegged orders must be entered as day orders.