Nasdaq amends peg rules to support market stability

Primary pegged orders with an offset amount can now be traded on a non-displayed basis on Nasdaq OMX’s three US-based equities exchanges, a move that will “improve system and inter-market price stability”, according to the exchange group.

Primary pegged orders with an offset amount can now be traded on a non-displayed basis on Nasdaq OMX’s three US-based equities exchanges, a move that will “improve system and inter-market price stability”, according to the exchange group.

The rule change applies to Nasdaq OMX’s New York stock market, Nasdaq OMX BX in Boston and Nasdaq OMX PHLX in Philadelphia, following filings with the Securities and Exchange Commission (SEC).

In its filings, Nasdaq OMX asserts that the display of primary peg orders with an offset amount can result in “quote flickering” or excessive messaging when multiple venues display pegged non-marketable orders that subsequently interact with each other.

Previously, rules on Nasdaq OMX’s US exchanges permitted primary and market pegged orders to be displayed or non-displayed while midpoint pegged orders are not displayed. A primary pegged order’s price is equal to the inside quote on the same side of a market; a market pegged order matches the inside quote on the opposite side of the market. Primary and market peg orders can establish their pricing relative to the appropriate bids or offers by selecting one or more offset amounts that will adjust the price of the order by the offset amount selected.

The rule change to eliminate the display of primary pegged orders with an offset amount will prevent feedback loops, “adding to system stability and improving market quality”, the exchange said.

Nasdaq OMX added that market participants would still be able to display orders through other order options, such as using primary pegged orders without an offset amount or market pegged orders. Primary pegged orders without an offset amount are do not pose the same messaging risks because they are priced at the inside quote.

The SEC previously gave the green light for non-display of pegged orders when it approved the application of BATS Exchange to register a national securities exchange.

On Friday, Nasdaq OMX confirmed plans to launch a third US options platform in 2012. The exchange group, which already operates the electronic Nasdaq Options Market and hybrid floor-based Nasdaq OMX PHLX, said the new exchange would introduce a new pricing and business model to the market.

“It is too early to tell the exact pricing or functionalities, but our aim is always to offer innovative market structure that improves the quality of the marketplace,” said Tom Wittman, head of Nasdaq OM’s US options business, in a statement.

There are currently nine options exchanges in the US. Listed options volumes have grown at a compound annual growth rate of 20% over the last decade. 

«