Options Markets
Distributive Linkage: August 31 Rollout
Introduction[1]
On August 31, Distributive Linkage is expected to go into effect across all seven (7) options exchanges. Distributive linkage is designed to replace the existing Option Linkage Authority (OLA). Unlike OLA, Distributive linkage will include routing Firm and Market Maker orders as well as Customer orders.
New to the Options Industry, Distributive Linkage is designed to incorporate elements of the Equities Market’s Regulation NMS, including a new trade-through exemption called the Intermarket Sweep Order (ISO). ISOs are Limit Orders routed to all Eligible Exchanges, and marked appropriately as “ISO” orders. These orders execute against the fully displayed size of any protected bid or offer. ISOs are designed to allow a large trade to fill against quotes priced worse than the market's best bid or offer (NBBO) only after they have met the requirement to sweep the top of the book for eligible protected markets. A broker can sweep and then fill the remainder of an order, as long as simultaneous “ISO Orders” are sent out to trade against the protected quotes on an away market. After they receive an order, several exchanges have the capability to sweep and fill the protected away quotes.
For Example:
Four (4) exchanges are displayed below. Exchange D has just received an order to sell 5,000 contracts.
Exchange A |
| Exchange B |
| Exchange C |
| Exchange D | ||||
Bid | Size |
| Bid | Size |
| Bid | Size |
| Bid | Size |
$0.52 | 700 |
| $0.52 | 900 |
| $0.51 | 300 |
| $0.47 | 3,500 |
$0.50 | 100 |
| $0.51 | 10 |
| $0.49 | 500 |
| $0.46 | 10 |
$0.48 | 30 |
| $0.49 | 20 |
| $0.47 | 30 |
|
|
|
$0.47 | 20 |
| $0.48 | 100 |
|
|
|
|
|
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How does this ISO work?
Before Exchange D prints a block at $0.47, it will send an ISO to Exchange A for 700 contracts at $0.52, Exchange B for 900 contracts at $0.52, and Exchange C for 300 contracts at $0.51. Then Exchange D will print the balance of the order (3,100 contracts) at $0.47. There is NO depth-of-book protection, only top-of-book protection. Please reference the exchange-specific pages, especially the FAQ sections, for more information about the routing capabilities of each exchange.
Consequently, customer orders resting on the book could be traded-through as a result of the new ISO order exception. These trade-throughs are not currently captured as part of best execution statistics. Information pertaining to ISO order modifiers will be available via OPRA data feeds, which might limit a retail customer’s access to information. Please also note that Satisfaction Orders[2] no longer apply under the new Distributive Linkage Plan.
This site is designed to be an information repository for retail customers affected by Distributive Linkage Requirements.
The links below will provide you with information for each options exchange including, but not limited to, data outlining new order types, testing procedures, contact information, rule filings, comment letters, and -- ultimately -- answers to frequently asked questions.
Any questions should be directed to Tom Price, the Staff Advisor to the SIFMA Equity Options Trading Committee, at tprice@sifma.org.
Exchange-Specific Information
NYSE AMEX Options
NYSE ARCA Options
Boston Options Exchange (BOX)
Chicago Board Options Exchange (CBOE)
International Securities Exchange (ISE)
NASDAQ Options Market (NOM)
NASDAQ Philadelphia Stock Exchange (PHLX)
New OPRA Codes
Intermarket Sweep Order (ISO)
Transaction is Trade-Through Exempt
[1] Joint Industry Plan, http://www.sec.gov/rules/sro/nms/2009/34-59647.pdf.
[2] Satisfaction Orders are defined as an order sent through the OLA to notify a participant of a trade-through to seek satisfaction for the liability arising from that trade-through. Historically, when an execution on an Exchange caused a trade-through of another exchange’s disseminated quotation the member(s) who traded against the booked order was liable for execution of the Satisfaction Order. Satisfaction Orders no long apply under Distributive Linkage.