Midpoint Peg Orders

Definition

The term midpoint peg order refers to those that are aligned with the average of the National Best Bid and National Best Offer.  Midpoint peg orders can be used by traders to discover hidden orders and those in what are referred to as dark pools.

Calculation

Midpoint Peg = (National Best Bid + National Best Offer) / 2

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 pegged to midpoint orders, midpoint peg orders are "pegged" to the simple arithmetic average of the NBB and NBO and would execute at that price.  As is the case with other types of pegged orders, a midpoint is a non-displayed order.  In addition to its use by traders to discover hidden orders, midpoints also allow the trader to stay near the front of the bidding queue and receive the best possible price for their order.

If either the NBB or NBO changes their price, the midpoint peg order will also change.  That is to say, it will always remain at the midpoint unless it is executed.

Example

A trader would like to purchase 1,000 shares of Company XYZ.  The NBB is currently \$19.80 per share, while the NBO is \$20.20.  The trader places a buy midpoint peg order at a price of \$20.00.  While the order will not be displayed, it will be executed if there is a midpoint sell order, a limit sell order, or a market sell order for Company XYZ at \$20.00.