From the September 01, 2010 issue of Futures Magazine • Subscribe!

ISE introduces DNR order type

The International Securities Exchange (ISE) announced in July a new order type called "Do not route" (DNR). Both "priority" and "professional customers" will be able to designate an order DNR so that it would not be routed to another exchange if the ISE is not posting the National Best Bid or Offer (NBBO).

DNR orders will be executed at the NBBO in whole or part on the ISE order book only. If ISE is not posting NBBO, ISE members can match or improve on NBBO through a step up auction (flash) to trade with the DNR order.

Boris Ilyevsky, managing director of ISE options, acknowledges that the threat of a ban on flash orders contributed to the need for DNR orders but adds that there are other reasons as well. He points out that most high frequency traders execute trades based on specific cost (and time) calculations and to have orders routed to an exchange with another pricing structure creates problems.

Flash orders have been maligned as unfair by some legislators and the SEC is contemplating banning them. What flash orders do, in the options arena, is to let the exchange flash orders to their market makers, allowing them to meet the NBBO before an order is routed away from that exchange. There is a benefit to end-users with flash orders because there is a routing fee charged by away markets when an order is sent away from the home market and because several options exchanges have a maker/taker pricing function that charges the market taker (the one hitting the bid or lifting the offer) and paying the market maker. If flash orders are restricted in options, end users could be forced into a more expensive trade. Do not route type orders have been in existence for a number of years in the equity arena.

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