Primary Peg Orders (Regular Peg Orders)

Definition

The term primary peg order refers to those that follow the best bid, when buying a security, and the best offer, when selling a security.  Primary peg orders allow traders to get the best possible price as a security moves within certain boundaries.

Explanation

Peg orders are frequently used by traders in volatile markets, because they provide the opportunity to get the best possible price when buying or selling a security.  Peg orders are based on the National Best Bid Offer (NBBO).  The National Best Bid (NBB) is the highest price a trader is willing to pay for a security (or stock); while the National Best Offer is the lowest price someone is willing to receive when selling a security.  The NBBO refers to the difference between the NBB and NBO, and this is known as the spread.

Also known as regular peg orders, primary peg orders are "pegged" to one side of an order book.  For example, if the trader wants to sell a stock, it would be pegged to the offer side of the order book.  Peg orders allow a trader to track the best offer when they are selling a stock and the best bid when buying a security.  It's also possible to place a limit on the order, which is the highest price the trader is willing to pay for a security, or the lowest price they are willing to receive when selling a security.

When a peg order is placed, it displays the best bid; it will not reveal the trader's limit price.  If the best bid is below the trader's limit price, and an investor comes into the market with a sell order, the trader will get the best bid price.

Example

A trader would like to purchase 1,000 shares of Company XYZ, but is not willing to pay more than $20.00 per share.  The NBB is currently $19.80 per share, while the NBO is $20.20.  The trader places a peg order with a limit of $20.00.  When the trader places their peg order, it does not show the market their limit price of $20.00; instead it joins the NBB of $19.80.  If the NBO price reaches the trader's limit price of $20.00, a buy order is executed.

Related Terms

market peg orders, National Best Offer, National Best Bid, market order, limit order, day orderlong position, alligator spread, dark pools, discretionary orders, Do Not Reduce orders, midpoint peg orders, Not-Held orders, order book