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Consider a low-volume exchange-traded security that sometimes sees no trading volume for days on end. Examples of such securities are some bonds, preferred shares, SPACs, and ETFs listed on the NYSE or Nasdaq. Suppose Alice happens to submit a buy limit order at \$10 on stock exchange X while Bob submits a sell limit order at \$10 on stock exchange Y. Alice and Bob submitted their orders at the same time, at the same price, but on different exchanges. This produces a locked market. Stock exchanges X and Y happen to give traders rebates for adding liquidity but charge fees for removing liquidity. Alice is unwilling to move her order to stock exchange Y because she will then have to pay fees for removing liquidity. Bob is thinking along similar lines.

From my understanding of Regulation NMS, locked markets are not allowed. Do both Alice and Bob have to remove their orders, and later resubmit them with Alice voluntarily decreasing her bid by \$0.01 and/or Bob voluntarily increasing his offer by \$0.01? What incentivizes them to prevent a locked market when they resubmit their orders?

(Cross-posted from Personal Finance and Money SE: How do locked markets get resolved in a low-volume market?)

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Locked or crossed markets are generally not allowed except in extenuating circumstances where synchrony may be difficult, e.g. right after open or in the final minutes leading into the close.

What happens in a locked or crossed market depends on the venue and where a stock is listed.

For Nasdaq-listed stocks, the Nasdaq exchange as well as many ECNs and market makers will charge you a fee to route away. Often, that is in addition to any access fee charged at the venue where your order is sent. You can also access many venues via SuperMontage which can match orders and route orders to the best venue. However, that may (again) incur access fees. If you send orders that lock or cross other orders in the pre-market, your orders will go into the Nasdaq opening cross. Orders marked for the Nasdaq closing cross can only execute at Nasdaq and need not worry about locking or crossing the market for the closing cross.

NYSE- and AMEX-listed stocks may trade on SuperMontage and orders can route to the NYSE or AMEX. Again, fees may be charged to "route away" in addition to access fees charged by the venue. One difference is that the NYSE and AMEX have specialists. Therefore, one possibility if you submit an order is that the specialist may decide to stop the stock and trade with you if they can offer the same price as available elsewhere. However, some quotes on AMEX may be inaccessible via SuperMontage. In those cases, markets may stay locked or crossed for a few seconds. Again, orders in the pre-market are often sent in to the NYSE or AMEX opening auction; and, orders for the closing auctions can only be sent to the listing exchange (NYSE or AMEX).

The difference between the NYSE or AMEX and Nasdaq is, as it has historically been true, due to specialists versus competing market makers.

One important note if you do historical research with older price data: When there were short sales restrictions or when odd lots were not displayed in the NBBO, even weirder situations arose. For example, suppose a NYSE stock had just ticked down and traded at the bid. You could jump in front of other people by sending a sell short at the bid or lower. Because of the downtick, the order could not be filled at the bid or lower. This led to the stock getting stopped by the specialist and the short order getting "price improvement" to execute at the offer. Therefore, if you do historical research, I would be cognizant that executions might look strange for shorts or odd lots.

For more information on what happens with locked and crossed markets, you might enjoy reading Shkilko, Van Ness, and Van Ness (2008) about locked and crossed markets.

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  • $\begingroup$ What does "route away" mean? Can't I avoid this "routing away" fee if I cancel my order on one ECN and submit the same order to another ECN? $\endgroup$ – Flux Sep 2 '20 at 7:39
  • $\begingroup$ Routing away is the mandate to send your order to another venue if it cannot be traded on the original venue but it could be traded at the other venue. You can usually avoid getting routed away on any venue. There are order tags you can specify to avoid getting routed away, e.g. "IOC"=immediate or cancel or "FOK"=fill or kill instead of "NOW" (which allows routing away to fast venues), "PNP"=post no preference, or "Fill or return." Unless you maintain your own high-speed connections and have negotiated auto-execute or preferential fee schedules with some venues, routing away is often good. $\endgroup$ – kurtosis Sep 2 '20 at 8:40
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    $\begingroup$ Full disclosure: I've usually been in situations where we have high-speed connections and agreements with other venues -- so saying routing away is often good hurts my soul. However, for retail traders, routing away is better than not being routed away and missing out on a fill. $\endgroup$ – kurtosis Sep 2 '20 at 8:43
  • $\begingroup$ Agreed routing away will avoid locks, but if you are simply sending directed limit orders without an algo of some sort 'taking care of it' for you, you can still lock. The main reason there is not a problem with simultaneous orders is either one or the other came first according to the official market data feed. See my answer in for more detail. money.stackexchange.com/questions/130429/… where this question was originally posted. $\endgroup$ – xirt Sep 3 '20 at 2:04
  • $\begingroup$ Agreed -- which is why I and most others I know have chosen to do our own routing and use tools that don't just fire and forget. Also agree that true crosses are rare -- about 0.3% at ArcaNYSE when I analyzed their data, for example. $\endgroup$ – kurtosis Sep 3 '20 at 3:48

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