My understanding is that a trader is required to be filed at the best available ask and offer price What happens if a trader routes their order to an exchange that does not have the most competitive bid or offer at the time the order is submitted I.E. ABC is 10.01 x 10.10 NASDAQ 10.01 x 10.10 ARCA 9.90 x 10.20 What happens to buy order that is manually routed towards ARCA?
Ok, If ARCA automatically routes order to the exchange with the best bid and ask price than what is the advantage of routing towards an exchange other than the primary?
You are missing the size ... Only size up to displayed NBBO is protected. The rest is not protected/routed. The rest of your order will execute at whatever the offers are at that exchange even though other exchanges may have better prices. That's why when you chose SMART route, the broker will try to do the routing for you to get you the best price (at least in theory).
In the US option market, you cannot trade through the NBBO (there are some few exceptions!). An exchange cannot execute an order internally if another exchange is showing a better market. An order can be routed and re-routed many times.
I assumed we were talking US equities. But even with options, I cannot imagine exchange holding on to the order and re-routing it. You must be talking some functionality offered by the broker, not the exchange.
For the US Option Market, that's the way it works. If required, the order will be re-routed until it gets fully filled. And the exchanges are doing it.
There's no depth of book in options. So exchange just routes to all regional exchanges. I don't know, so it's more of a question then a statement. Equities are only protected at NBBO, so if you send marketable limit order larger than protected size, the rest will sit on exchange's book. If you send market order, the rest will execute against that exchange book even though there is a potential price improvements at other exchanges. That's the reason people use SMART routers which use full depth of book to make routing decisions. You don't need to worry about these things in Futures markets as there is a single book.