Crossed and locked markets. Need answers from someone who really knows

Discussion in 'Trading' started by mbradley, Jun 24, 2001.

  1. Here is the question:

    With regards to crossed and locked markets, I am hearing two absolutley opposite things. I would appreciate some insight from some people who really understand this.

    The Nasdaq order handling rules specifically state that orders cannot be crossed. That is, someone cannot put a bid limit order higher than the lowest offer. Similarly, no person can put a sell limit order lower than the lowest bid. This is termed "crossing the market." If the order crosses the market, it is to be automatically rejected.

    Now, I see and hear all these post and discussions about Level 2 and best order routing and these discussions invariably start talking about some ECN taking off and leaving the market makers behind and consequently getting screwed on the order, etc. My question is this; How in the hell can this happen? The rules specifically define a crossed market and specifically disallow it. It is flat out illegal (during regular hours, not after hours). The inside market is defined as the NATIONAL best bid and offer, regardless of weather it is ECN or MM. So how is this possible?

    I am not a Level2 jock, nor do I intend to be. But I got to say, even in my basic "retail punter" account with Schwab, in a thickly traded product like QQQ, my fills on market orders are almost always right at the last inside bid and ask that I put it in at. That spread is usually less that 0.05. Now, I know Schwab has traders taking the other side of my trade, but even with that, Im right at the inside at the moment I click on the mouse. So I don't fully understand these statements such as "dont route through the AMEX, they'll just rape you, route through Island." and Island is outside the national best bid and offer.

    Any help in my understanding here would be appreciated. BTW, I have spent my tour of duty looking at a level 2 screen and i have read "Nasdaq Traders Toolkit" three times.



  2. as i understand it, the quotes that you recieve from nasdaq will not be crossed.. if the market in jnpr is 25.10 x 25.11 and someone enters an island bid for 25.15 the order is displayed as 25.10 so as not to cross the market.. what is happening though is that many firms are incorporating quotes from the ecn books into their level 2 feed, thereby showing the true market..
    it used to be that ecn orders that attempted to cross the market were rejected.. that rule was modified some time ago..
    again.. im no expert but this is the way i understand things to be.. =)

  3. You can technically cross the market using an ECN, if you are going after a posted bid or offer that is outside the market on the same ECN you use to execute on. So for instance, if the inside bid/offer is 50.10 by 50.12, and the best Island offer is at 50.15, you could use the Island ECN route and immediately lift that Island offer at 50.15, even though a market maker (or other ECN) had a better offer at 50.12. However, let's say you send in your buy order for 50.15 on Island and there is no Island offer at 50.15 or below for you to match up with immediately. In that case, your order would automatically be adjusted to below the best ask, in the above example 50.11, and be posted on Level II.

    With regard to the question why you wouldn't route directly to AMEX and go through Island, the reason is that you are dealing with a specialist on the AMEX, who although he may be showing the best bid or offer at that moment, could hold onto your order and fill it at a price that is advantageous to them rather than you. By going directly after an ECN, you know exactly what price you're getting and getting it immediately without the threat of having your order delayed. This often happens when a stock is moving fast, and although the specialist may currently have the best inside quote, by the time you send your order to him the market has moved and now you're sitting there waiting to see what price you get filled at, if at all. This isn't as much of a problem when you're trading listed stocks that don't move very much, i.e. QQQ. You need to take into consideration the nature of the stock you're trading as far as whether these problems are a consideration.
  4. janko


    and as far as schwab goes, well their market maker mayer schwitzer (sp??) who they deal with will provide auto execution on a certain amount of share. meaning that if you buy 500 shares at mkt, he will fill you the current ask for the autoex limit which might be 200 to 500 shrs, depending on the volatility of the stock and mayers participation in it, and the rest will go inot the traders que folder and wait to get executed from there! i see it all the time people put in a buy for 1000 shrs of any stock, 500 fills instatntly and the rest takes some time even if its a mkt order, and the prices vary. so if you trade thorugh schwab and if you trade the auto exec limit well then its a pretty good way to trade, you dont have to worry about partial fills, but if you try to move size, well get ready for some swings in prices. hope this helps.
  5. zboy and all,

    You seem to have a pretty good handle on this, so excuse my ignorance.

    You seem to be saying that you can cross by basically going with a market order and lifting the outside offer, but not by going limit order higher than the outside offer. Correct or not?

    The Nasdaq Traders Toolkit (NTT), which is basically an order routing book to the 10th degree, confirms what you say about Island...NTT "Note the the Island doesn't have this problem; it is the only ECN to program around this issue."

    NTT "Locking or crossing the market is one of the most common mistakes in placing a passive ECN order. It results in the order being deleted from the trading system."

    but the book then goes on to describe that within the same ECN, you could lock the market by bidding at that ECN's lowest offer and it well be executed in that ECN's order book. But as soon as that offer is taken out and no longer displayed on Level2, bidding above the National Best offer from that ECN would then Lock or Cross the market ans be rejected. So it appears that within the same ECN, the market can be locked and crossed to match orders within that ECN's book, but if that offer is then taken out, the same bid would then cross or lock the National Market and be rejected. Is my thinking clear on this?

    With regards to Island, NTT "Note: Island orders won't lock or cross the market. The Island has a bit of programming unique to the industry. Orders placed by traders that would, in other ECNs, lock/cross the market, won't do so if placed on the Island.....Say a stock is 10 x 10 1/16. You place an or on the Island to bid at 10 1/2.....the Island however (will) accept the order into its order book where it will display at the price you entered, 10 1/2 and send it to the Nasdaq at the best price allowed given the current inside market: in this cas 10. So it will dispalyed as a bid in the Nasdaq quotes montage at 10, while appearing in the Island book at 10 1/2. If the market moves up, the Island will reenter your order at higher and higher prices, until your limit is reached....You'll buy stock at the limit you requested: 10 1/2, even if the current inside market is 10 x 10 1/ careful. This is a double-edged sword. Her is the kicker. You can enter an order that on face value would seem to cross the market and get it filled, substantially away form the market, often to your detriment......remember island operates like an exchange unto itself and ISLD's speed can be a great benifit...but..." it then goes on to describe a stituation in which the National market is 99 x 99 1/16 and Island is outside the market and you accidently put 9 as a sell offer in Island, you could get executed against as it is treated as a limit sell order with a low of 9. so assume "there were bids at the following price sizes: 100 shares at 99 3/4, 100 at 98 1/2, 100 at 98 1/4 and 700 at will receive those prints....As far as ISLD is concerned, you have just received a price improvement over your order to sell at 9. Lucky You"

    Also, ISLD only shows its best bid and offer in the Nasdaq montage, so you wont know the depth of the Island book unless you have the order book.
    So be careful seems to be the message here!


  6. Dustin



    With isld you can post a bid/offer wherever you desire. Inside or outside the current doesn't matter. A few years ago this wasn't possible and the orders got rejected but luckily someone fixed that. This is a very useful feature because in fast moving stocks MM's update slowly and you often need to post outside the market.
  7. Mike,

    Your quotes from the NTT accurately describes crossing and locking the market with ISLD. However, one thing that is incorrect is your statement that only the best bid/ask is viewable from ISLD. If you have a Level II feed, you can see any/all ISLD bids/offers (if you don't have level II just go to and you can see them all in real time), so you can see when you enter an order where the ISLD prices are and subseqently what to do.

    To use an example, let's say you want to buy stock. The inside market is 50 x 50.10 and there's a market maker with the inside ask. You see there's an ISLD offer at 50.15 and you want to get in right away (maybe the stock is moving fast). Using ISLD you can enter your buy order at 50.15 and will immediately hit that posted ISLD offer even though a market maker had a lower posted offer. Now here's the rub. What if you enter your buy order at 50.15, but the closest ISLD offer is 50.20? Then your order will post on Level II as an ISLD bid just below the inside ask (in this example 50.10).
  8. Lancer


  9. Thanks for the reply fellows.