5.6.6. Executing Orders at the Nasdaq Market Center
How quotes and orders are recorded, or “booked,” on Nasdaq and how they interact with other quotes and orders on the system is the end result of a calculation system known as an execution algorithm. Some of the factors that go into that algorithm include:
• Price/time priority. Price/time priority describes the process used for executing Nasdaq system orders. In essence, the better-priced orders are executed first, and among equally priced orders, the ones entered earlier are executed first. In addition to price/time priority, the execution algorithm looks at the type of order entered. Displayed orders are executed first, followed by non-displayed orders and the reserve portion of quotes and reserve orders. The discretionary portion of Discretionary orders is executed last.
• Time stamps. Quotes or orders at the same price are ranked based on the time they are received. Orders are filled on a first in, first out (FIFO) basis. Orders with earlier time stamps are filled before those with later time stamps. When a market maker increases the size of its order at the same price level, the original time stamp will be kept for the original order and a new time stamp will be given for the additional order. When a market maker decreases the size of its order at the same price level, the original time stamp is maintained. Once a market maker’s order decreases to zero, a new time stamp is given for any additional orders.
• Reserve size. This refers to the ability of Nasdaq participants to enter an order in a manner in which only part of the order will be displayed. The remainder is then held in reserve on an undisplayed basis. The part of the order that is not displayed is called the reserve size