Often, people are confused with the concept of locking/crossing the market, especially with ISLD orders.
First, some definitions. A locked market in a stock means that the best bid for the stock equals the same price as the best ask price. For example, DELL may be priced at 33 1/8 bid, and 33 1/8 offered. This is a locked market.
A crossed market occurs when the best bid price is above the best offer price. For example, DELL may be priced at 33 1/8 bid, and 33 1/16 offered. This is a crossed market.
According to Nasdaq rules:
"You are required to take reasonable steps to avoid locking or crossing the market. An example of a 'reasonable step would be to enter a preferenced SelectNet order against the bid or offer that your quote would lock or cross. If you don't receive a response within 30 seconds of sending the preferenced SelectNet order, you may then display the order in your quote even if that quote will lock or cross the other side."
In order to comply with this rule, ISLD will never post an order to the Nasdaq book that would lock or cross the inside bid or ask. If your order would do this, it will immediately be rejected by the system and returned to you. The following is how this may affect your ISLD orders.
If you place an ISLD order, four things can happen:
1) Complete fill: If any existing limit orders are posted on ISLD that are within your price limits, you will be filled by these posted orders.
Example: DELL is trading at 62 bid by 62 1/16 ask on Nasdaq. You place an ISLD order to buy 2000 DELL at 62 1/4. The ISLD order book has 300 offered at 62 1/16, 500 offered at 62 3/32, 3000 offered at 62 1/8, and 2000 offered at 62 1/4. Your entire order will be filled as follows: 300 at 62 1/16, 500 at 62 3/32 and the remaining 1200 at 62 1/8.
2) Partial fill: Assume the same information from the above example,
except you order 2000 shares at 62 3/32. Now, your order will be partially filled as follows: 300 at 62 1/16, and 500 at 62 3/32. Your remaining 1200 shares cannot be filled because there are no opposing matching orders. Also, the remaining orders cannot be posted on Nasdaq, since it would cross the market (i.e. you would be attempting to place a bid above the inside offer price; Note: a locked market would also not be allowed, which would be attempted to post on Nasdaq a bid price which equals the inside ask price).
3) No Fill: If there are no existing ISLD orders on the book that matches with your order, and your order cannot be posted on Nasdaq because it will lock or cross the market, then your order will automatically be cancelled and returned to you. Example: DELL is trading at 62 bid by 62 1/16 ask on Nasdaq. You place an ISLD order to buy 2000 DELL at 62 1/16. The ISLD order book has 500 offered at 62 3/32, 3000 offered at 62 1/8, and 2000 offered at 62 1/4. There are no existing ISLD offers at or below your bid. Therefore, you currently cannot be filled from ISLD. If posted on Nasdaq, your order would lock the market in DELL at 62 1/16 bid and 62 1/16 offered. Therefore, the ISLD system will not allow you to do that and your
order will be returned unfilled. For more information, see Chapter 2 of the Nasdaq Traders Manual:
nasdaqtrader.com
4) Order posed on ISLD: If your bid order is lower than the inside offer, your order will be posted on the ISLD book and the best bid/offer price on the ISLD book will be posted on Nasdaq. |
