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I have been looking this up and I feel like I keep running into different definitions. My understanding is that an ISO order is one which will get filled with the displayed quantity in a particular exchange's book until it needs to be routed to other market venues in order to comply with reg NMS.

Looking at http://usequities.nyx.com/markets/nyse-arca-equities/order-types (towards the bottom) it makes it sound like an ISO order will sweep down the levels of ARCA's book without regards to external quotes. This sounds like it's either a violation of reg NMS, or an exception in which the trader takes on the liability of having checked the NBBO himself. If it is the latter case, it is still different from the definition above.

So which one is it?

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Your first definition is wrong; I'm not sure where you got that from. Your second definition is correct: the ISO alerts the exchange that the submitting party has taken responsibility for RegNMS and requests a fill at only that venue's price; there is no routing away. Obviously, there is a huge red-tape burden to get permission to do this.

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  • $\begingroup$ Thank you, I had come across the first definition in some forum..maybe it's called something else (when instead of getting just a partial fill locally, the order automatically gets routed to different venues to keep getting filled at the nbbo) $\endgroup$
    – Palace Chan
    Commented Apr 25, 2013 at 20:09
  • $\begingroup$ It also seems from here: elitetrader.com/vb/attachment.php?postid=2804485 that some routing can happen. For example, while first page says something similar to what you say..the second page says "if an away price is better than the NYSE quote. The NYSE honors it before trading at the NYSE" $\endgroup$
    – Palace Chan
    Commented Apr 25, 2013 at 20:17
  • $\begingroup$ @PalaceChan There are two key sentences on that second page: "The Exchange does not have an obligation to send the order to an away market if it is an Intermarket Sweep Order" and "Intermarket Sweep Orders sent to the NYSE are not subject to this auto-routing". $\endgroup$
    – chrisaycock
    Commented Apr 25, 2013 at 20:36
  • $\begingroup$ Right..so how do they "honor" the better quote? $\endgroup$
    – Palace Chan
    Commented Apr 25, 2013 at 20:48
  • $\begingroup$ @PalaceChan They don't. $\endgroup$
    – chrisaycock
    Commented Apr 25, 2013 at 20:54

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