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:
(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.]
 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.