Do Traders Use Protection?

It’s a question that burns in the minds of IROs daily. No, not that one. This one: “Will an ISO post to the Nasdaq if the TIF modifier is one other than an IOC?”

Sentences like that are why alcoholism remains widespread. It’s also the reason IR folks don’t want to know how markets work. Too complicated.

Yet if we’re brutally honest, we know we should understand more. I mean, you can’t claim to be a great Yankees fan and not know the rules of baseball.

The sentence above from Nasdaq Reg NMS FAQs says: If I’ve chosen to fill my order up to the designated number of shares at a set price without leaving the Nasdaq to check for better prices elsewhere, suppose the time to complete the order is something besides “immediately or forget it.” Will that order be accepted at the Nasdaq?

This is how markets work. If you want homework, Google “Rule 611 Reg NMS.”

Buyers today are entitled by law to get the lowest price for a stock. In the 1970s, Congress got together and brooded at length about how to improve competition. As this forum of politicians deemed itself superior to thousands of years of unfettered human commercial interaction, it determined that forcing people to trade at the best price was an improvement over people figuring it out for themselves.

Before the rule was even in effect, exemptions flurried. Because obviously getting the best price begs a giant question: For What Quantity?

To address vast variances, the SEC decided on Rule 611, called the Order Protection Rule.

Remember (if you’re old enough) playing tag and getting to yell “Olly, Olly Oxen Free”?

ISOs are olly-olly-oxen-free orders. If you’ve got an ISO for 1,000 shares at the NYSE, it may only find 10 shares at the confluence of your specified price and the lowest one available. If the order is immediate or cancel (IOC), then it returns with 990 shares unfilled. If the Time in Force (TIF) is “Day,” then throughout the day the order is going to loiter at the exchange where it’s been routed, filling the rest if and when its price is hit.

But it doesn’t have to leave the NYSE for the better price at a “protected quote” elsewhere. Like other situations in which prophylactics offer a measure of security, a protected quote is one that, shall we say, comes with confidence. A protected quote is by definition immediately and automatically accessible. Therefore, no manual quote – somebody entering a trade – is protected.

Protected from what, you say? Somebody skirting it, like an ISO can. So if you want your price to be guaranteed to display, then it must be an automated order.

Do you see the problem? To comply with Reg NMS, machines and markets must automate orders. It’s the only way that they get protection. That means machines have been given an edge over humans.

At the same time, regulators have granted a bunch of exceptions to exchanges that let institutions work around those prices. What then do you suppose the displayed prices reflect?


Not the best value, or even the best price. Perhaps not even real intent. What happens when compliance requires that you do one thing and believe another? Deception, sleight of hand, arbitrage.

On the cattle ranch of my youth, when we brought cattle to market the auctioneer didn’t rattle off a bunch of prices to a set of shill bidders batting worthless and hollow trades back and forth while the real pricing was occurring somewhere else unknown to us and anyone else in the room.

The only thing required for a fair market is that buyers and sellers are satisfied that nobody is gaming the price they’re getting.

The equity markets today are the grand archetype of gamed prices. And that means, IR folks, that you need to do more to know the REAL price of your shares, and who’s setting price, be it investors, trend followers or arbitragers.

Further, the IR chair should be leading the campaign for issuer involvement in market rules. We’re doing our part to help with the IDI (and we’ll have an update soon – we are talking with folks at the very highest decision-making levels. But I guarantee that change will only happen if the household names trading on the Nasdaq and the NYSE demand it – so demand it!).

Oh, and the answer is: Yes. The ISO with a TIF of something other than IOC is accepted at the Nasdaq. You probably have thousands of those bouncing around in your volume, arbitraging spreads between protected quotes and undisplayed prices.