Monday, May 2, 2011

Equity Technical Update #2011 - 6
NASDAQ to Offer Mid-Point Peg Post-Only Order Functionality Effective Monday, June 27, 2011

What has been announced?

Updated 6/17/2011: NASDAQ will offer a Mid-Point Peg Post-Only order type, beginning Monday, June 27, 2011. The Mid-Point Peg Post-Only order type has been approved by the SEC.

What are Mid-Point Peg Post-Only orders?

A Mid-Point Peg Post-Only order is a non-displayed order type that is priced at the mid-point between the National Best Bid and Offer (NBBO) and only adds liquidity, except when the economics are in the interest of the investor to remove liquidity.

A Midpoint Peg Post-Only Order that would be assigned a price of $1 or less per share will be rejected.

What is the functionality of a Mid-Point Peg Post-Only order?

Mid-Point Peg Post-Only is a new order type that combines elements of the existing Mid-Point Peg and Post-Only order types. Like a regular Mid-Point Peg Order, a Mid-Point Peg Post-Only Order is a non-displayed order that is priced at the mid-point between the NBBO. However, like a Post-Only Order, the Mid-Point Peg Post-Only Order does not remove liquidity from the System upon entry if it would lock an order on the book. Rather, the Mid-Point Peg Post-Only Order will post and lock the pre-existing order, remaining non-displayed.

However, if the Mid-Point Peg Post-Only order crosses a hidden or displayed order on the book such that the economics are in the interest of the investor to remove liquidity, the order will execute. For prices above one dollar, that means any cross by $0.0050 will execute, because the realized price improvement ($0.0050) exceeds the sum of the execution fees ($0.0030) and foregone rebate ($0.0015).¹

Example 1:

• NASDAQ has a displayed bid for $1.10 and an offer of $1.11, and there is a non-displayed bid for $1.105.
• A firm enters a Mid-Point Peg Post-Only order to sell, which is priced at $1.105.
• The incoming Mid-Point Peg Post-Only order will post to the book and will not execute.

Example 2:

• NASDAQ is at the NBBO, with a bid of $1.10 and an offer of $1.13, and there is a non-displayed buy order at $1.12.
• A firm enters a Mid-Point Peg Post-Only Order to sell, which is priced at $1.115.
• The incoming order will execute against the resting order at $1.12, because the price improvement of $0.0050 exceeds the execution fee of $0.0030 and the liquidity provider rebate for non-displayed orders of $0.0015.

Which protocols offer the Mid-Point Peg Post-Only functionality?

Effective Tuesday, May 31, 2011, the Mid-Point Peg Post-Only order type will be supported on the OUCH and FIX Lite (Flite) protocols for NASDAQ.

Please check the NASDAQ technical specifications for updates.

Will testing be available?

Testing for this functionality will be available during a Saturday User Acceptance Test (UAT) scheduled for May 14, 2011. Firms should email NASDAQ OMX Trading Services to register for the test. For more information, refer to the Saturday Testing Policy page on the NASDAQ OMX Trader^® website.

Firms may also test in the NASDAQ Testing Facility during its normal operating hours. The NASDAQ Testing Facility is available Monday through Thursday, 7:30 a.m. to 10:00 p.m., Eastern Time (ET) and Fridays 7:30 a.m. to 4:00 p.m., ET.

Where can I get additional information?

• Contact NASDAQ OMX Subscriber Services at +1 212 231 5180.
• Contact Transaction Services U.S. Market Sales at +1 800 846 0477.

¹$0.0015 is the maximum non-displayed rebate that NASDAQ offers. Please note that not all firms qualify for the $0.0015 non-displayed rebate. Execution logic is subject to change as pricing changes.