Scope of Order Protection Rule
Compliance
The Order
Protection Rule, which is also known as the Trade-through rule, applies to
Regulation NMS stocks. According to the
SEC filing, an "NMS stock" is defined in paragraphs (b)(47) and
(b)(46) of Rule 600 as a security, other than an option, for which transaction
reports are collected, processed and made available pursuant to an effective
national market system plan. This definition effectively covers stocks listed
on a national securities exchange and stocks included in either the National
Market or SmallCap tiers of NASDAQ. It does not include stocks quoted on the
OTC Bulletin Board or elsewhere in the OTC market.
Manual
quotations are not protected under the Order Protection Rule. Protected bids and offers are defined as
quotations in an NMS stock that are:
·
displayed
by an automated trading center;
·
disseminated
pursuant to an effective national market system plan; and
·
an
automated quotation that is the best bid or best offer of a national securities
exchange, the best bid or best offer of The NASDAQ Stock Market, Inc., or the
best bid or best offer of a national securities association other than the best
bid or best offer of The NASDAQ Stock Market, Inc.
Transactions
that are exempted from order protection compliance include the following[1]:
(a)
The
transaction that constituted the trade-through was effected when the trading
center displayed that the protected quotation that was traded through was experiencing
a failure, material delay, or malfunction of its systems or equipment.
[Referred to as the self-help exemption]
(b)
The
transaction that constituted the trade-through was not a regular way
contract.
[Examples of not a regular way contract include next day settlement,
same day settlement or sellers option]
(c)
The
transaction that constituted the trade-through was a single-priced opening,
reopening, or closing transaction by the trading center.
[The opening process in the OTC market for NASDAQ stocks is different
from the listed market. UTP has an
official open but CTA does not. While
not official, listed markets do open at a single price even if this is not flagged
by CTA. FIF will follow up with the
plans to determine if there is an issue.]
(d)
The
transaction that constituted the trade-through was executed at a time when a
protected bid was priced higher than a protected offer in the NMS stock.
[Exemption for
trading through in a crossed market]
(a)
The
transaction that constituted the trade-through was the execution of an order
identified as an intermarket sweep order.
[Referred to
as the intermarket sweep exemption]
(b)
The
transaction that constituted the trade-through was effected by a trading center
that simultaneously routed an intermarket sweep order to execute against the
full displayed size of any protected quotation in the NMS stock that was traded
through.
[Exception for
a transaction that executes at an inferior from the NBBO because other intermarket
sweep orders simultaneously hit protected quotes.]
(c)
The
transaction that constituted the trade-through was the execution of an order at
a price that was not based, directly or indirectly, on the quoted price of the
NMS stock at the time of execution and for which the material terms were not
reasonably determinable at the time the commitment to execute the order was
made.
[Exemption
covering executions at a negotiated price, e.g., VWAP orders]
(d)
The
trading center displaying the protected quotation that was traded through had
displayed, within one second prior to execution of the transaction that
constituted the trade-through, a best bid or best offer, as applicable, for the
NMS stock with a price that was equal or inferior to the price of the trade-through
transaction.
[Referred to
as the 1 second rule, intended to address flickering quotes.]
(e)
The
transaction that constituted the trade-through was the execution by a trading
center of an order for which, at the time of receipt of the order, the trading
center had guaranteed an execution at no worse than a specified price (a
stopped order), where:
i.
The
stopped order was for the account of a customer;
ii.
The
customer agreed to the specified price on an order-by-order basis; and
iii.
The
price of the trade-through transaction was, for a stopped buy order, lower than
the national best bid in the NMS stock at the time of execution or, for a
stopped sell order, higher than the national best offer in the NMS stock at the
time of execution.
[Stopped
orders are given on the consolidated tape.]
[1] The exemptions listed are taken directly from the SEC filing with the Financial Information Forum (FIF) interpretation of the exemption given in brackets and italics below.