I have a strategy that involves being first in the order queue in a tight market where the tick can change from bid to ask or ask to bid by one tick. I am looking at pegged orders so when the bid changes to ask or the otherway around i want to be first position on that tick change. I was wondering if that is possible with pegged orders?
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3 Answers
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Pegged NBBO/MidPoint orders, each exchange has algo check documentation or contact them about time/price/Fifo and most importantly pro-rata allocations for peggged orders.
Here is a doc from NYSE to have a look at: https://www.nyse.com/publicdocs/nyse/markets/nyse/Pillar_Differences.pdf
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On nasdaq, their pegged orders do not operate inside the exchange matching engine as you would expect.. they have some undocumented method that does not gaurantee fifo order is conserved when the order stack moves from one level to another, the re-reinsertion is random at best and they are secrely letting other people jump the queue at worst. IEX does this inside the matching engine, and they actually have specific order types to mitigate against adverse selection due to sub-millisecond latency arbitrage by other market particpants. Specifally, the D-Peg and D-limit order types you may want to look into .
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$\begingroup$ > "IEX does this inside the matching engine". Interesting... do you have a source for this? Their rule book is non-committal with respect to time priority: '... Due to the way in which the Exchange processes re-pricing, orders’ relative time priority is generally preserved.' I decode this as 'best efforts' which is comparable with other venues. $\endgroup$ Mar 21, 2021 at 20:13
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$\begingroup$ @SergeiRodionov yes, myself, by talking to iex and nasdaq via phone and email and reading the specs of each $\endgroup$– crowMar 22, 2021 at 22:06
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$\begingroup$ This is important, but it's better to verify repricing priority with a full order log. I would use two orders with same limits but different display sizes and check if their priority is maintained. Or spot anonymous orders with fairly unique display sizes and see if they keep their relative priority. $\endgroup$ Mar 23, 2021 at 14:24
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As far as I know, pegged orders are never "pegged" to the same orderbook you add them to. For instance
- you can peg an order to the NBBO, for instance: at the mid of the NBBO
- you can peg an order in the dark to the touch of the BBO of an orderbook belonging to the same operator, for instance: at the best bid for a buy and best ask for a sell.
This second case is the most common since in most regulations, you cannot "create a new price in the dark": a trade in the dark has to be done at a price that would exist in a lit pool. This is especially very clear since MiFID in Europe. To be accurate this rule is for small orders only, and is called the "imported price waiver" (see Market Microstructure in Practice by L and Laruelle, any of the 2 editions).
From the viewpoint of the trader, the mechanism in the dark is that you hope that someone will try to go to the dark before crossing the spread and hitting the best opposite. If you wait at the mid in the dark you will be hit first and capture this aggressive liquidity flow: each of you will spare half of a spread (compared to crossing the spread). Of course this comes at the cots of a lower probability to obtain the trade: the probability that the aggressive flow effectively accepts to potentially loose the roundtrip to this dark orderbook times the probability that it paid the fixed costs (and the fees) to trade in the dark is between you and this flow. Hence you can see a trade done on another orderbook at your price on the reference orderbook without your order being hit.
Some operators claim that it reduces your footprint in the market (ie market impact). This is not that true because if you are sophisticated enough, obtaining a transaction via a limit order means suffering from an opportunity cost: does this half spread worth it? For instance, if there is really a large aggressive flow coming in your direction, it would have been better to move your order away, to be paid more than at the mid or the touch to provide liquidity to these guys.
