Pegged Orders
Pegged orders are dynamic order types that automatically adjust their price relative to a reference price, such as the National Best Bid and Offer (NBBO), midpoint, or primary market quote. These orders help traders maintain optimal positions in the order book without constant manual updates, particularly in fast-moving markets.
How pegged orders work
Pegged orders maintain a specified relationship to a reference price through automatic price adjustments. As the reference price changes, the pegged order's price updates accordingly. This dynamic behavior is particularly valuable for market makers and institutional traders who need to maintain competitive quotes across multiple venues.
Common types of pegged orders
Primary peg
Pegged to the same side of the NBBO (bid or offer). Often used by liquidity providers to stay competitive while avoiding aggressive pricing.
Midpoint peg
Pegged to the midpoint between the national best bid and offer. Popular for minimizing market impact and achieving price improvement.
Market peg
Pegged to the opposite side of the NBBO. Typically used by more aggressive traders seeking immediate executions.
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Applications in trading strategies
Pegged orders are essential components of modern algorithmic trading strategies, particularly in:
- Market making operations
- Dark pool liquidity provision
- Best execution implementation
- Portfolio rebalancing
Performance considerations
The effectiveness of pegged orders depends heavily on:
- Market data processing speed
- Order update latency
- Exchange processing capacity
- Network performance
For high-frequency applications, the tick-to-trade latency of pegged order updates becomes critical.
Risk management
While pegged orders provide automation benefits, they require careful risk controls:
- Price collars to prevent extreme movements
- Maximum update frequency limits
- Circuit breakers for market disruptions
- Position and exposure monitoring
Market impact
Pegged orders can influence market microstructure through:
- Increased price discovery efficiency
- Enhanced liquidity distribution
- Reduced spread volatility
- Improved price continuity
Regulatory considerations
Trading venues must implement specific controls for pegged orders to comply with regulations like Regulation NMS and MiFID II. These include:
- Price validation checks
- Update frequency monitoring
- Audit trail requirements
- Anti-gaming provisions
Pegged orders represent a sophisticated tool in modern market structure, requiring careful implementation and monitoring to maximize their benefits while managing associated risks.