How U.S. Exchanges Route Orders to Honor the NBBO
Summary
The document explains how a market order sent to one U.S. exchange may be handled when another venue displays a better price. It describes the Regulation National Market System’s Order Protection Rule: protected trading centers must avoid executions at prices inferior to the SIP national best bid and offer, and a venue may route orders to markets showing better prices. Routing can involve sending orders to multiple venues, rather than repeatedly forwarding an order from one exchange to another.
The explanation argues that quote checks and routing occur quickly, on timescales from nanoseconds to milliseconds, and that venue order types and routing strategies address changing quotes. It offers a conceptual account rather than a detailed technical specification. The actual path and outcome depend on exchange rules, order instructions, available liquidity, and market conditions; the passage does not establish that every market order is routed in the same way or guarantee a fill at a displayed quote.
Key ideas
- The Order Protection Rule requires protected trading centers to avoid executions inferior to the SIP NBBO.
- A venue may route an order to exchanges displaying a better price.
- Routing strategies can send orders to multiple venues rather than forwarding them sequentially.
- Quotes can change during routing, and displayed prices do not guarantee execution.
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Full text
# Exchange redirecting order # Exchange redirecting order I was reading about exchange to understand better how they execute my market-orders. So let's say I am sending a market order to buy one share of AAPL to NYSE. When NYSE gets my order he looks at the best offer in his order book (so the lowest ask price) and then look at all the ask price on all the other exchanges (NASDAQ,...). If the best offer in NYSE order book is lower or equal than the best offer on all the other exchanges then NYSE execute my order with his order book otherwise it redirects my order to the exchange that has the best offer. Is that correct? If this correct, I am wondering how all of this work because checking the offer on all the other exchanges takes time. So NYSE takes a lot of time before executing my order. And let's say the best offer is on NASDAQ then NYSE redirects my order to NASDAQ exchange but then the time my order travels to NASDAQ exchange maybe the offer on NASDAQ is not the best anymore. So how all of this work? ## Answer by quantinho (score 1) https://quant.stackexchange.com/a/78996 The answer to your first question is YES. Under the Regulation National Market System (Reg NMS) -> Order Protection Rule, exchanges are required to execute your order against all other exchanges that trade that security. The order should not be executed at a price worse than SIP NBBO. First, it does not "take NYSE a lot of time begore executing" you order. If NYSE is protected market center, then it is required to quote prices at least as good as the SIP NBBO. Second, each exchange provides dozens of order routing strategies and order types which are designed to handle most of the scenarios that one can think of. Exchanges have to follow regulations which are usually high level and furthermore they try extra steps for attracting more clients. For example, in your case NYSE will check NBBO and if NBBO is better price, it can simultaneously send the order to all exchanges that have better price (now it is their job to handle this order), and if the order comes back it will be executed in it's own book (even if NBBO changes, the order will arrive faster than the updated NBBO). It's not like there are 100 venues and your order keep hopping from one to another and price keeps changing. All of these happens withing nano to milli seconds and there are DMM (HFT) and other participants who have their own requirements. You can check the following doc for some reference: https://nasdaqtrader.com/content/ProductsServices/Trading/Workstation/nasdaq_refguide.pdf
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