Of course, lots of HFTs use it for other purposes. Could an ISO be used to hunt for stops without having to sweep the book? Or can you only take limits and stops are left un-touched? If plausible, that would be my incline as to why HFTs would use this order type.
ISOs allow for transactions that defy the order protection rule but at the cost of a fairly lengthy set of prescriptive rules and guidelines that must be heeded. If you use the power of intermarket sweep orders, you need to make sure you understand the responsibilities because the consequences for non-conformance can be high. Millions in fines have been levied upon firms who do not heed both the letter and the spirit of Rule Fear of failure to meet the strict requirements for ISOs often causes brokers to stay away.
However, where there is responsibility, there is also opportunity. As stated previously, an increase in the use of intermarket sweep orders usually leads to an increase in fill rates which generally leads to greater profitability which, in turn, leads to more trading.
A broker that wants to allow usage of intermarket sweep orders by their clients can do so via a conduit agreement. Having a conduit agreement is just the first step and providing the necessary compliance and surveillance infrastructure is straightforward but not without its own challenges. In the end, it can be well worth it to pursue this new business opportunity.
Order routers are responsible for the routing of orders in NMS stocks on behalf of customers or themselves. In addition to automated trading centers and trading centers, they include any other broker-dealers responsible for routing orders. FAQs 4. The following questions and answers have been compiled by the Staff to assist in the application of Rule and Rule They presume that the reader will be familiar with the Rules themselves, as well as the defined terms set forth in Rule b of Regulation NMS.
Some of the more significant of such defined terms include automated quotation, automated trading center, bid or offer, intermarket sweep order, manual quotation, NMS stock, protected bid or protected offer, protected quotation, quotation, regular trading hours, SRO display-only facility, SRO trading facility, trade-through, and trading center. The questions and answers are intended to provide general guidance.
Facts and circumstances of particular transactions may differ, and the Staff notes that even slight variations may require different responses. In addition, the questions and answers reflect current technological and other industry conditions and may require modification in the future if such conditions change materially. The Staff may update these FAQs periodically. To be a protected quotation under Rule , a quotation must be automated, but the consolidated quotation stream that currently is disseminated to the public does not identify quotations as automated or manual.
How will quotations be marked so that the public can readily identify automated and manual quotations? Answer: The three Networks, which disseminate consolidated quotation data for NMS stocks to the public, have agreed to adopt uniform identifiers for manual and automated quotations. For example, Network A and Network B have added or redefined the condition codes for non-automated quotations displayed by the NYSE or Amex under specified market conditions.
Will there be any public disclosure identifying transactions that are executed pursuant to an exception or an exemption from Rule ? Paragraph b of the Rule sets forth exceptions that are designed primarily to promote intermarket price priority. Rule d provides that the Commission may grant exemptions from the Rule that are necessary or appropriate in the public interest and consistent with the protection of investors.
In the NMS Release, the Commission noted that increased transparency concerning excepted transactions would be beneficial because it would give timely notice to the public that a transaction qualified for an exception. Do the trade-through requirements of Rule continue to apply when the Network quotation data for one or more NMS stocks is interrupted due to problems at the Network data processor? Answer: No, the trade-through requirements of Rule do not apply to an NMS stock when the relevant Network for such stock is unable to disseminate quotations on a real-time basis.
The Networks disseminate real-time quotations in NMS stocks pursuant to the joint-SRO market data plans which are effective national market system plans. Accordingly, when the Network processor is unable to disseminate real-time quotations for an NMS stock pursuant to such plans, there can be no protected quotations in the NMS stock and the trade-through requirements of Rule do not apply.
To be a protected quotation under Rule , a quotation must be displayed by an automated trading center. Answer: The requirements for automated trading centers are set forth in Rule b 4. They are relevant only for those trading centers that intend to display protected quotations, as defined in Rule b 57 and 58 , in the Network quotation streams. Accordingly, only SRO trading facilities and ADF participants are subject to the requirements for automated trading centers.
In addition, the anti-discrimination and other access requirements of Rule a and b apply only to quotations displayed by SRO trading facilities and ADF participants. Rather, the SRO trading facility itself must meet such requirements for all quotations displayed through such facility, no matter what their source.
After the phase-in of compliance with Rule is complete, what procedures will apply when a new automated trading center intends to commence displaying protected quotations?
Answer: The Extension Release notes that, after the phase-in of compliance with Rule is complete, new automated trading centers can begin displaying protected quotations only pursuant to established rules or procedures. Given the need for market participants to receive sufficient advance notice of all sources of protected quotations, SROs will be unable to use the notice filing procedures of Form Pilot to initiate new automated trading centers.
What are the requirements that govern automated trading centers in identifying their quotations as automated or manual? Answer: The definition of an automated trading center in Rule b 4 requires, among other things, that a trading center 1 implement such systems, procedures, and rules as are necessary to render it capable of meeting the requirements for automated quotations, as defined in Rule b 3 ; and 2 immediately identify its quotations as manual whenever it has reason to believe it is not capable of displaying automated quotations.
The definition of automated quotation requires, among other things, that a trading center provide an immediate response to incoming immediate-or-cancel "IOC" orders and immediately update its quotations. Consequently, automated trading centers must monitor their systems on a real-time basis to assess whether they are functioning properly. If an automated trading center has reason to believe that it is not capable, because of systems or other problems, of immediately and automatically transmitting responses to IOC orders and immediately and automatically updating quotations, the trading center is required, at a minimum, to identify such quotations as manual.
The self-help exception allows trading centers and order routers to bypass the protected quotations of an automated trading center that is experiencing systems problems. Immediately upon invoking the exception, the electing entity must notify the bypassed automated trading center.
As part of its policies and procedures under Rule b 4 i , an automated trading center should, at a minimum, provide a mechanism for receiving self-help notifications, as well as assign personnel to monitor the receipt of such notifications on a real-time basis, so that potential systems problems can be promptly evaluated and appropriately addressed.
The affirmative duty of automated trading centers to identify their quotations appropriately is a vitally important element of Regulation NMS. It will help promote the smooth and efficient functioning of intermarket price priority and trading in general. Timely and accurate identification of quotations will give investors, broker-dealers, and other trading centers essential information concerning the status of quotations in NMS stocks, thereby minimizing the extent to which the systems problems of a particular trading center can interfere with efficient trading throughout the national market system.
For example, when a trading center experiencing systems problems promptly fulfills its duty to cease identifying its quotations as automated and thereby removes them from trade-through protection, it will not be necessary for other trading centers or order routers to invoke the self-help exception.
Under Rule b 3 iii , an automated trading center is required to provide an immediate response to an IOC order without routing the order elsewhere. Answer: An SRO trading facility that displays quotations submitted by an order-delivery ECN can meet the requirement of Rule b 3 iii only if such quotations are closely integrated within the SRO trading facility.
To preclude the potential for double liability on a single order e. Whether the quotations of an order-delivery ECN are closely integrated within the SRO trading facility will be determined from the standpoint of those who route orders to the SRO trading facility.
The SRO trading facility must be capable of providing a response to incoming orders that does not significantly vary between orders handled entirely within the SRO trading facility and orders delivered to the ECN.
In addition, the SRO rules that govern orders delivered to the ECN must assure fast and efficient handling and quotation updates, subject only to addressing the potential for double liability. Question 2. Is it permissible for an order-delivery ECN to submit the same quotation simultaneously to multiple automated trading centers for display in the Network quotation stream?
Answer: No, such a use of the order-delivery functionality would misrepresent the available liquidity for an NMS stock. For example, an ECN that submitted the same share quotation to two SRO trading facilities, while intending to use the order-delivery feature of each SRO to avoid double liability through multiple executions against the same quotation, would overstate by shares the true liquidity available for the stock.
Similarly, display of the same quotation by the ECN directly through the ADF and indirectly on an order-delivery basis through an SRO trading facility would be impermissible.
Is a trading center that displays an automated quotation required to execute an IOC order against the available reserve size for such quotation? Answer: Yes, the definition of automated quotation in Rule b 3 ii requires that a trading center immediately and automatically execute an IOC order against an automated quotation up to its full size.
Can the quotations of two or more ADF participants be consolidated and reflected in a protected bid or a protected offer of the ADF? The Commission therefore specified that a protected bid or protected offer must be accessible by routing an order to a single protected quotation at a single destination i.
Accordingly, when two or more ADF participants are quoting the best price for an NMS stock, the ADF must identify a single participant quotation for its best bid and size and a single participant quotation for its best offer and size. The Networks will identify such ADF participants in the Network quotation streams that are disseminated to the public. To comply with the ISO exception, Rule b 30 requires that ISOs be routed to execute against the full displayed size of better-priced protected quotations.
What requirements apply to the automated trading center displaying a protected quotation when it receives an ISO? An ISO therefore triggers both the firm quote requirements of Rule b and the limitation on fees of Rule c.
The destination trading center is required to execute the ISO at a price at least as favorable as the price of the protected quotation unless previously executed or withdrawn , 15 and any execution at the price of the protected quotation regardless whether executed against displayed or reserve size is subject to the fee limitation of Rule c.
If the trading center intended to charge a high fee for this execution, the order router potentially could be charged a fee higher than the limited fee that was expected when the ISO was routed. Again, the order router potentially could be charged a fee higher than the limited fee that was expected when it routed the ISO. To address the potential problems created by high-fee executions, the NMS Release states that trading centers intending to charge high fees must provide a functionality that enables market participants to assure that they will never inadvertently be charged a fee in excess of the limitation in Rule c.
In the absence of such an affirmative indication, the trading center cannot charge fees for execution of an ISO that exceed the limitations of Rule c. For example, the trading center must provide an order execution that meets the firm quote requirements of Rule b. In addition, if the ISO is also marked as IOC which triggers the requirements for automated quotations in Rule b 3 , the trading center must provide an order execution up to the full size of its protected quotation at a price that is at least as good as the price of its protected quotation.
To assure an immediate cancellation and response, order routers should use the IOC designation. Trading centers, in turn, will have the option of adopting rules requiring that the unexecuted portion of ISOs be immediately canceled.
If, however, a trading center chooses not to cancel the portion of ISOs that cannot be executed immediately, its rules will need to address appropriately the subsequent handling of the unexecuted portions. For example, such rules would need to comply with the relevant SRO rule on the display of locking or crossing quotations see FAQ 5.
In addition, any subsequent execution would not qualify for the original ISO exception created by the initial routing of the ISO.
The exception will expire after the ISO exhausts the liquidity that is immediately available at the trading center. Consequently, a subsequent execution of the remaining balance of an ISO must independently comply with Rule e.
A broker-dealer executes a block trade for a customer at a price that does not trade through a protected quotation at the time of execution. When the trade is reported to the relevant SRO, however, the price is inferior to a protected quotation.
How should the broker-dealer demonstrate its compliance with Rule ? Answer: The broker-dealer should implement procedures that reliably document the time of execution of the trade.
The identity of the parties to the trade could be added subsequently. To be reliable, the documentation must be generated simultaneously with the time of execution and not be subject to retrospective alteration. For example, the time of execution could be documented manually by machine-stamping the current time on a paper order ticket with all order tickets numbered and accounted for , or documented electronically by inputting an order ticket into an automated system with the system maintaining a record of all inputs.
Question 3. A broker-dealer intends to utilize the ISO exception to execute a block trade for a customer at a price inferior to one or more protected quotations. How should the block trading desk execute and report the block trade in compliance with the ISO exception? Answer: Under Rule b 6 , the broker-dealer is required to route, simultaneously with execution of the block trade, an ISO to execute against the full displayed size of any protected quotation with a price superior to the block trade price.
To meet this requirement, the broker-dealer will need to utilize an automated system that is capable of ascertaining current protected quotations and simultaneously routing the necessary ISOs. The Staff does not believe that it would be possible for manual routing of ISOs to comply with the requirement in Rule b 6. The extent to which a routed ISO will receive an execution at the destination trading center cannot be known at the time of routing for example, the protected quotation may already have been executed against or cancelled prior to arrival of the ISO.
As a result, a broker-dealer could face practical issues in implementing the block trade for its customer, including 1 transferring to the customer the benefit of any better prices obtained through executed ISOs, 2 handling the residual size of ISOs that did not receive a fill, and 3 reporting the block trade to the relevant SRO. If, for example, a customer consents to not receiving the benefit of any better prices obtained by the ISOs, the broker-dealer could report the block trade immediately on the routing of the ISO orders because the block trade size would not be affected by any fills of the ISOs.
By giving its informed consent, the customer would, in effect, recognize that the block price was determined, at least in part, by a judgment of the extent to which the broker-dealer would receive fills of the ISOs at better prices.
At that point, the size of the block trade would be reduced to reflect any fills of the ISOs, and the block trade could be reported to the relevant SRO as an ISO execution.
Importantly, however, all material terms of the block trade would need to have been finally agreed upon at the time when the ISOs were routed, subject only to adjusting the block trade size to reflect ISO fills. Therefore, the broker-dealer would not be required to route any additional ISOs when the block trade is reported to the relevant SRO.
In surveiling for compliance with Rule b 6 in this context, the broker-dealer should compare routed ISOs with the protected quotations that were displayed at the time of routing. Further complications could arise if the broker-dealer does not receive a response within a reasonable time to all of the ISOs. To fill a customer order for an NMS stock, a broker-dealer effects, as riskless principal, one or more trades and assigns the trades at the same prices to the customer in compliance with the relevant SRO rule on riskless principal reporting.
When an intermarket sweep order is being executed, only the inside quote NBBO at each available exchange is "protected". This means that orders resting on an exchange at prices that are inferior to the best bid or ask prices at the time of the intermarket sweep print are not considered to be "protected" and may be traded through.
The trader that enters the intermarket sweep order would be required to fulfill their Regulation NMS requirement by executing the maximum available quantity on exchange A at The
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