0
$\begingroup$

I was reading about exchange to understand better how they execute my market-orders. So let's say I am sending a market order to buy one share of AAPL to NYSE.

When NYSE gets my order he looks at the best offer in his order book (so the lowest ask price) and then look at all the ask price on all the other exchanges (NASDAQ,...). If the best offer in NYSE order book is lower or equal than the best offer on all the other exchanges then NYSE execute my order with his order book otherwise it redirects my order to the exchange that has the best offer. Is that correct?

If this correct, I am wondering how all of this work because checking the offer on all the other exchanges takes time. So NYSE takes a lot of time before executing my order. And let's say the best offer is on NASDAQ then NYSE redirects my order to NASDAQ exchange but then the time my order travels to NASDAQ exchange maybe the offer on NASDAQ is not the best anymore. So how all of this work?

Improve this question
$\endgroup$
1
  • $\begingroup$ It is a complicated system, with many venues where a stock can be traded, but I don't think it works quite like what you describe. I hope someone can explain to us how order routing really works. $\endgroup$
    – nbbo2
    Commented Apr 14 at 13:56

1 Answer 1

Reset to default
1
$\begingroup$

The answer to your first question is YES. Under the Regulation National Market System (Reg NMS) -> Order Protection Rule, exchanges are required to execute your order against all other exchanges that trade that security. The order should not be executed at a price worse than SIP NBBO.

First, it does not "take NYSE a lot of time begore executing" you order. If NYSE is protected market center, then it is required to quote prices at least as good as the SIP NBBO. Second, each exchange provides dozens of order routing strategies and order types which are designed to handle most of the scenarios that one can think of. Exchanges have to follow regulations which are usually high level and furthermore they try extra steps for attracting more clients. For example, in your case NYSE will check NBBO and if NBBO is better price, it can simultaneously send the order to all exchanges that have better price (now it is their job to handle this order), and if the order comes back it will be executed in it's own book (even if NBBO changes, the order will arrive faster than the updated NBBO). It's not like there are 100 venues and your order keep hopping from one to another and price keeps changing. All of these happens withing nano to milli seconds and there are DMM (HFT) and other participants who have their own requirements.

You can check the following doc for some reference: https://nasdaqtrader.com/content/ProductsServices/Trading/Workstation/nasdaq_refguide.pdf

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.