Can people jump ahead of your limit orders on NYSE b/c of the "parity rule?"

Discussion in 'Order Execution' started by Love2Trade$, May 27, 2019.

  1. Hi Lovers of Order Execution! :D

    Short article by Themis Trading on NYSE limit order jumping "on parity": . If I understood this article correctly - Designated Market Makers (DMMs), floor brokers, and people who hire floor brokers (Firms - hedge funds, high frequency trading firms, other) are all allowed to trade "on parity" (read - jump ahead of you or at least next to you) with your limit orders even though you sent yours first.
    1. Am I understanding this correct or are there angles / nuances I'm missing that makes this not as bad as it seems?
    2. What can an individual retail investor (or even a small startup prop firm) do to combat this even to a degree?
    Thank you for your thoughts!
  2. Robert Morse

    Robert Morse Sponsor

    This only applies to NYSE permit holders. They do not jump a head, their terminal get a match on all trades on the NYSE if their clients are matching the NYSE BB or BO. If you send your order to any other ECN, this does not apply.

    IMO this is not worth your time as a concern.
    userque likes this.
  3. You are one knowledgeable dude you know that @Robert Morse ! I'm going to start calling you Google Robert = Goobert. Thanks for putting the article in context. Are the NYSE permit holders just DMMs or can also include the hedge funds, HFTS who hire floor brokers?
  4. Oh and if their clients are not matching the NBBO, but just matching your limit order which sits outside the NBBO - do they still get a match?
  5. Robert Morse

    Robert Morse Sponsor

    The NYSE has to match the NBBO to trade at all or it is a trade through. So let's assume the NYSE bid matches or betters the bid on other exchanges and ECNs. 10.10 x 10.13. Your bid gets sent to the NYSE and you are bidding for 1000 shares, A NYSE broker is working a not held order to buy 100,000 and there are bids on NASDAQ and EDGX. He sees your bid and all bids at 10.10 he bids for 1000 shares. I'm not sure of the NYSE split, let's just say for this example it is 40%/60%. A market order comes in the NASDAQ to sell 1000 shares. The Nasdaq order would get filled, you and the other NYSE order gets none. Same for EDGX. An order gets sent to sell 1000 at the market and get directed to EDGX. The order there gets filled, the NYSE and other exchanges do nothing. Now an order gets sent to the NYSE to sell 1000 shares. Based on the split above, you would get 600 shares and the broker for his client would get 400 shares. NASDAQ and EDGX do nothing. the NYSE split is just an example. I'm not sure how these get split. The NYSE order with the broker has a big advantage with stocks that do not move much but have a lot of paper on the order book. A very popular institutional order is when the broker is asked to beat the VWAP. E.G buy 500,000 GE, beat the VWAP. They can often do this as they are always offering liquidity and getting an early fill. The floor broker charges an execution fee.
  6. Whoah thanks for the detailed example! Everything about your example made sense - the split concept, only affecting NYSE not other venues, and the matching parity process. My question is - does parity apply to quotes outside of the NBBO? Sorry if I am wording this confusing.

    Say $10.10 x $10.13 from your example above. I submit a limit buy for 100 shares @ $10.07 @ 10:13:20 am (random time just hypothetical). Floor broker client submits 100 share limit buy $10.07 @ 10:13:45 am (later than me by 25 seconds). Obviously, neither of us are getting filled right now w/ current BB @ $10.10. Pretend BB drops to our bids @ $10.07. Pretend also me and other order are only 2 orders in existence. Sell 100 shares gets sent to NYSE.
    1. Does floor broker client get "matched" to me in this instance as we are now both BB (but were not BB at time of order submission)?
    2. If yes to #1 above, then is the answer to this scenario (assuming 40%/60% split): I get 60 shares, floor broker client gets 40?
  7. Oh and you said, "The NYSE order with the broker has a big advantage with stocks that do not move much but have a lot of paper on the order book."

    Does that phrase mean the broker has a lot of resting orders on the book?
  8. Robert Morse

    Robert Morse Sponsor

    If Sprint Corp, NYSE symbol "S" is 7.15 x 7.16 2mm x 1mm on the NYSE, without a match, you would have to wait for every order in front of you to get filled until it is your turn. That means the odds of buying on the bid and there still being a bid (rather than all the bids selling and now it is 7.14x7.15) is rare. With a broker matching for you, you get a small part of each trade on the bid on the NYSE and do not have to wait.
  9. Robert Morse

    Robert Morse Sponsor

    You can't trade outside the NBBO because of rule NMS.
  10. Understood both responses, thanks a lot!
    #10     May 27, 2019