Pegged Orders

Understanding pegged orders

Pegged orders represent a sophisticated order type that automatically tracks and updates its price based on a specified market reference point. Unlike static limit orders, pegged orders continuously adjust their price to maintain a defined relationship with their reference price, making them particularly valuable in dynamic market conditions.

Key reference points

Common reference points for pegged orders include:

• Best Bid: Order pegged to the current highest buy price
• Best Offer: Order pegged to the current lowest sell price
• Midpoint: Order pegged to the middle point between best bid and offer
• Primary: Order pegged to the price on the primary listing exchange
• Last Trade: Order pegged to the last executed trade price

Types of pegged orders

Primary peg

Primary pegged orders track the same side of the market. For example, a buy order pegged to the bid will automatically adjust its price to match the best bid price, optionally with an offset.

Midpoint peg

Midpoint pegged orders maintain their price at the midpoint between the best bid and offer. These orders are popular in dark pools and alternative trading venues for minimizing market impact.

Market peg

Market pegged orders (or reverse pegs) track the opposite side of the market. A buy order pegged to the offer price helps traders capture the spread while providing liquidity.

Applications in trading

Liquidity provision

Market makers extensively use pegged orders to:

• Maintain competitive quotes
• Manage inventory risk
• Automate spread capture strategies
• Reduce operational overhead

Execution optimization

Institutional traders employ pegged orders within their algorithmic execution strategies to:

• Minimize market impact
• Reduce execution costs
• Adapt to changing market conditions
• Maintain price discipline

Risk considerations

Market stability

Pegged orders can potentially contribute to market volatility through:

Technical challenges

Trading venues must carefully manage pegged orders to:

• Prevent feedback loops
• Maintain fair and orderly markets
• Ensure system stability
• Handle high message volumes

Market impact and best practices

Implementation considerations

When using pegged orders, traders should consider:

• Venue selection
• Reference price quality
• Update frequency
• Queue priority rules
• Latency sensitivity

Performance monitoring

Key metrics for evaluating pegged order performance include:

• Fill rates
• Price improvement
• Queue position
• Reversion analysis
• Implementation shortfall

Regulatory framework

Pegged orders are subject to various regulatory requirements including:

• Price manipulation prevention
• Best execution obligations
• Market transparency rules
• Risk control requirements

This regulatory oversight helps ensure pegged orders contribute to market efficiency while maintaining market integrity.