Pegged Order

Pegged Order is a market order type where an investor instructs a broker to buy or sell securities at a price or rate linked to a specific market index. This strategy aims to ensure that the investor's trade execution is closely aligned with prevailing market conditions.

By pegging the order to a market index, investors can mitigate the risk of overpaying or underselling securities. This is particularly useful in volatile markets where prices can fluctuate rapidly. Employed as part of a risk management strategy, it allows investors to enter or exit positions at prices tied to objective market benchmarks rather than relying solely on subjective assessments.

• Pegged order is a type of order in securities trading where the price is tied or pegged to a specific reference point in the market, such as an index, benchmark price, or the best bid/offer.
• It includes pegged-to-market, pegged-to-midpoint, and pegged-to-primary. They dynamically adjust prices based on market conditions, such as the national best bid/offer or midpoint. This allows traders to buy or sell securities at optimal prices.
• This approach ensures trades align with prevailing market conditions, minimizing execution risk and potentially achieving better prices. They provide flexibility, efficiency, and adaptability, particularly in volatile markets, enhancing overall trading performance.

A pegged order, also referred to as a pegged-to-market order, is a type of market order in which an investor instructs a broker to buy or sell securities at a price linked to a specific market index, such as the national best offer (NBO) or national best bid (NBB). This order type allows traders to automatically adjust their buy or sell price in relation to the current market conditions. In the USA, a pegged order may maintain a purchase price relative to the NBO or a sale price relative to the NBB.

There are different types of pegged-to-market orders, including primary orders that enable investors to benefit from the best prices within defined boundaries and market orders, where traders preset an offset amount to pay above or below the best national bid, executing at the mid-point or nearby. Pegged orders are particularly useful in volatile markets, providing a mechanism for investors to tap into the best available prices at a given moment.

Its different types are listed below:

1. Primary Pegged Orders: The primary peg orders dynamically adjust their price in relation to the primary market's current best bid (for sell orders) or ask (for buy orders) prices. The goal of a primary order is to maintain competitiveness within the primary market by automatically adapting to changes in the leading bid or ask prices. This type of order ensures that the investor's order remains aligned with prevailing market conditions, enhancing the likelihood of execution at favorable prices.
2. Market-Pegged Orders: These are specifically designed to track and adjust to changes in the overall market price. These orders are pegged to the current market price but can be set with an offset to ensure execution at a price slightly better or worse than the market price, depending on the trader's strategy. Such orders are particularly useful for traders seeking to capitalize on the momentum of the market, allowing them to participate in price movements while maintaining control over execution parameters.
3. Midpoint Pegged Orders: A pegged-to-midpoint order allows traders to seek price improvement by targeting the midpoint of the National Best Bid and Offer (NBBO) when executing trades. This order type automatically adjusts its price to peg to the midpoint as the market moves in any direction. It ensures that the trade is executed at a price aligned with the current market conditions.

There are several steps involved in placing a pegged order, which are as follows -

1. Reviewing Market Conditions: The trader begins by reviewing the current market conditions, including the National Best Bid and Offer (NBBO) for the targeted security.
2. Determining Order Parameters: They decide on the specifics of the pegged order, including whether to buy or sell, the quantity of securities, and the desired offset amount from the market price.
3. Selecting Destination: The trader chooses the destination or trading venue where they want to submit the order, which could be a specific exchange or trading platform.
4. Choosing Order Type: They select the appropriate order type, such as PEG MKT, for a pegged-to-market order.
5. Setting Limit Price: The trader specifies the initial limit price for the order, typically based on the current market price adjusted by the chosen offset amount.
6. Entering Offset Amount: They input the offset amount, which determines the distance from the market price at which the order will be pegged.
7. Transmitting Order: The trader transmits the order to the selected destination for execution.
8. Monitoring Execution: They monitor the market and keep track of the order's execution. If market conditions change significantly, they may need to adjust or cancel the order accordingly.

Let us look at some examples to understand the concept better -

Example #1

Suppose Kelly is an investor who wants to sell shares of a particular stock. She aims to achieve a price slightly above the national best bid (NBB) to maximize her profits. Using a pegged-to-market order, she instructs her broker to sell the shares only if the order can be executed at a price equal to the best national bid plus an offset of 1%.

The broker actively monitors the market and executes the sell order when they find a bid equal to the national best bid plus a maximum markup of 1%. In this scenario, Kelly is leveraging a pegged-to-market order. She aims to sell her shares at a price that reflects the prevailing market conditions. Additionally, she seeks to obtain a slightly higher price to optimize her returns.

Example #2

The New York Stock Exchange (NYSE) came under scrutiny and penalties in a well-known instance involving pegged orders for enabling traders to take advantage of the system. According to NYSE regulations, traders might utilize such orders. This allowed them to find concealed orders that others had placed. They got crucial insight into pricing and market demand.

Due to the fact that favored traders were able to obtain an informational advantage by using hidden tactics, this approach raised questions regarding market fairness and transparency. Such occurrences highlight the difficulties in preserving the market. They underscore the challenges posed by intricate trading tactics and changing market dynamics despite attempts to regulate and increase transparency.

This article has been a guide to what is Pegged Order. Here, we explain the concept in detail along with its types, examples, and how to place it. You may also find some useful articles here –

• Market Order vs Limit Order
• Market-On-Close Order
• Market-On-Open Order