I'm studying the series 55 and it talks about ISO (intermarket sweep orders) This is what they say Market Center A 10.50 100 10.51 100 10.52 900 Market Center B 10.50 200 10.51 200 10.52 900 if you send an ISO order to Market center A 1000 shares limit price 10.54 the book says that it will fill 100 shares from market center A @ .50 200 shares from Market center B @ .50 100 shares from market center A @ .51 200 shares from Market center B @ .51 400 sharse from Market center A @ 52. I thought that the ISO order enables you to get inferior prices and sweep just the book of the center are you routing to, I thought you'd get 100 shares from market center A @ .50 100 shares from Market center A @ .51 700 shares from market center A @ .52
IMHO, the answer in the book is wrong. It depends on how a particular market center executes ISO orders. For example, if you route your ISO order down to NYSE you'll get the following: 200 shares from Market center B @ .50 100 shares from market center A @ .50 100 shares from market center A @ .51 600 sharse from Market center A @ 52 In order to comply with RegNMS, NYSE will take 200@.50 on B since it's NBBO protected, and then sweep the book for the rest size.
Doesn't Reg NMS require all market centers to execute ISO orders in the same fashion? To clarify your response, I agree with the fills at the protected quote, but wouldn't the order of execution actually be: A @ .50 B @ .50 A @ .51 A @ .52 I wouldn't think you would have to fill at other protected quotes before your own since NYSE is protected market center. I'm trying to get a better feel for how ISO's work...I think the book might actually be right (depends if during order routing 0.51 becomes a new protected quote...you might get filled like the book suggests, even though it is not very intuitive).
If you can imagine combining the books of both Market A and Market B into one aggregate book and sorting the prices accordingly... then if you were to execute a *market* order on that aggregate book, the fill prices you'd get would effectively be the same what you'd get if you executed the ISO order across multiple markets as described in the original post. Am I correct in saying that? Market orders and ISO orders are similar in that both fill immediately... the difference is that a market order will consume the best orders in a single book, whereas an ISO order will consume the best orders across available markets. In some ways, you might think of a "smart routed" market order as being similar to an ISO... in that both seek immediate execution and consider multiple markets. Anyone, please feel free to correct, just trying to get a conceptual understanding of this.
ISO Definition from Reg NMS: Intermarket sweep order means a limit order for an NMS stock that meets the following requirements: 1) When routed to a trading center, the limit order is identified as an intermarket sweep order; and 2) Simultaneously with the routing of the limit order identified as an intermarket sweep order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the NMS stock with a price that is superior to the limit price of the limit order identified as an intermarket sweep order. These additional routed orders also must be marked as intermarket sweep orders. ---- Also see bottom of page 2 of the attachment that gives an example of how the NYSE would handle ISO's. The way I read it says the "book" mentioned above is correct. ---- Also, this link, section 4, has good info on order routing techniques and how limit prices, IOC, and ISO instructions work together... http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm#sec4